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Bull of the Day: Align Technology, Inc. (ALGN)

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Align Technology, Inc. (ALGN - Free Report) is a new-age dental company, best known for its Invisalign system. The tech-focused firm posted back-to-back strong quarters to end 2020 on a high note and its outlook is impressive, as it seeks to grab more market share and further challenge the traditional orthodontics industry’s old-school metal braces.

Straighter Teeth

Align was founded in 1997 and it went public back in 2001. The company designs and manufactures the Invisalign system. Let’s allow Align to provide the basics in its own words:

“By combining advanced 3D modeling for digital treatment planning, shape-engineering based on biomechanical principles, and mass-customization and 3D printing, we’ve revolutionized the orthodontic industry.”

The advanced clear aligner system has shaken up the orthodontics space, as people look for viable alternatives to traditional metal braces. ALGN helps provide similar abilities to straighten teeth and correct various other orthodontics issues.

The company works with dental professionals worldwide to provide their patients with the options for various Invisalign plans. Align works hand-in-hand with dentists and orthodontists, who are able to digitally scan a patient’s teeth.

A digital plan is then finalized, and custom aligners are made using the firms “state-of-the-art printing process.” Most Invisalign users are then placed on schedules that provide them various lengths of time to wear each different set or single clear aligner. They are then swapped out, as the issues are fixed over time.

Align boasts that it has helped treat over 9.6 million patients with the Invisalign system. Along with the actual aligners, Align’s iTero intraoral scanner and exocad CAD/CAM software helps identify the issues and create the best plans to fit the patient’s needs.

The company’s success over the last two decades has inspired other clear aligner companies to enter the market, including Candid and SmileDirectClub (SDC - Free Report) , which went public in 2019. The newer firms make similar claims. But there are some key differences.

For instance, Candid is focused on a totally at-home experience, with everything shipped and consultations done remotely. Meanwhile, SmileDirect gives customers the options of an in-person scan, or an at-home kit.

Solid Fundamentals

The other clear aligner companies are focused on a more modern telemedicine-style approach in the age of Teladoc Health, Inc. (TDOC - Free Report) and others. Instead, Align remains committed to a more hands-on experience where orthodontists regularly monitor a patient’s progress in person, after conducting the initial scans and running through the options.

Millions of customers have opted for this in-person method since it can be a big investment and it is not as simple as trying on clothes and returning them if they don’t fit. There is a reason that dentists and orthodontists have to go to school for a very long time, and it might be part of the reason why SmileDirect stock has largely underwhelmed since its Sept. 2019 IPO.

Align shares have climbed around 125% in the last year to crush its highly-ranked Medical-Dental Supplies industry’s 22%. This is part of a larger run that’s seen its stock price soar 650% in the last five years.

The recent market pullback has helped cool things down and possibly create a better buying opportunity. The stock fell another 6% Wednesday to close regular trading at $527 a share. This puts it about 16% below its early February records.

The downturn has also pushed it below neutral levels in terms of RSI at 38. Investors should note that anything under 30 on the Relative Stretch Index is often considered overbought, with anything above 70 regarded as oversold.

ALGN’s valuation highlights its status as a growth stock since it trades at a solid premium to its industry. Yet, at 12.4X forward sales, it’s trading below its own highs and at a big discount against other pandemic high-flyers like Shopify (SHOP - Free Report) that trades at 40X. Plus, ALGN trades at a discount to Teladoc’s 15.2X.

ALGN’s growth highlights the strength of its business model amid increased competition. The company’s revenue has climbed by an average of 25% in the past five years, and this figure is weighed down by just 3% growth in 2020.

The recent setback happened as dentist and orthodontist offices closed temporarily during the early days of the coronavirus, while people avoided some non-essential medical treatments. The firm’s second quarter revenue fell 41%, but it quickly regained momentum, with Q3 sales up 21% and fourth quarter revenue up 28%.

ALGN topped our Q4 fiscal 2020 earnings and revenue estimates in early February. The company posted record revenue and volumes from Invisalign aligners and iTero scanners. Align also improved its balance sheet and increased its free cash flow. And company executives said that it saw greater adoption from both adults and teenagers.

Looking Ahead

Zacks estimates call for Align’s first quarter FY21 revenue to climb 46%, with Q2 projected to skyrocket 139% against the easy-to-compare period last year. The company’s earnings outlook is even more impressive over this stretch.

Longer-term, ALGN’s adjusted fiscal 2021 earnings are projected to climb by 74% to $9.11 a share on the back of 40% or $1 billion stronger revenue that would see it pull in $3.47 billion. Align is then projected to follow up its FY21 expansion with 21% higher sales and 23% better earnings in fiscal 2022.       

Bottom Line

The nearby chart highlights the company’s improved overall earnings outlook, with its FY21 consensus up 13.5% and its FY22 figure up 10.5%. This bottom-line positivity helps Align grab a Zacks Rank #1 (Strong Buy) right now, alongside a “B” grade for Momentum in our Style Scores system.

Meanwhile, seven of the 10 broker recommendations Zacks has for Align come in at “Strong Buys.”  That said, there could more selling and volatility in the near-term.

But the long-term bull case remains in place as ALGN operates a relatively unique business within the broader medical space. And having straight teeth is hardly going out of style.

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