Align Technology Overvalued

Align Technology Inc. (ALGN - Analyst Report) is engaged in the design, manufacture, and marketing of Invisalign, a proprietary system for treating malocclusion, or crooked teeth.

The company’s business fundamentals are negatively affected by the current economic turbulence. As such, we expect revenue to decline in FY09. Furthermore, we think that the earnings quality could become an issue as management finds it difficult to meet growth targets.

The stock currently trades at a P/S multiple of approximately 2.6x for 2009, higher than the industry mean of 2.3x and the comparables mean of 2.2x. The stock has returned approximately 47% since the beginning of April 2009, leading it to outpace the S&P 500 by more than 25% since the beginning of the year. We think that this is partly due to speculation.

Signs of a recovery in its business fundamentals remain a year or more off. We think that the stock deserves to trade at 10% discount to the comparables mean. This equates to a P/S multiple of approximately 2.0x and to a target price of $8.80. We downgrade this stock and rate it a Sell.

Rajarshi Maulik contributed to the report.