Align Technology, Inc. (ALGN) is a global, innovative dental device manufacturer with a strong record of growth and financial performance. As the dental healthcare industry is expected to expand and become more friendly towards technologically advanced products, the company stands to increase its market share and grow its top and bottom line. In this analysis, I examine Align’s business, financial performance and valuation as well as the industry’s outlook for the coming decade.
Recent Stock Performance
Over the past 6 months, Align Technology has fallen into the growth stock rerating path, after an impressive stock price rally following the outbreak of the Covid-19 pandemic. During a period of broader market uncertainty and pullbacks, ALGN has seen a steep decline of over 25%, now trading at $ 499, with a 52-week low of $ 432. Over the same 6-month period the S&P has posted a small loss of -0.45%, while the healthcare sector has seen a wider -4.66% retreat. From a longer-term perspective, over the past 5 years, Align’s stock price has grown 422%, beating both the S&P 500 and the healthcare sector handily. Currently, the stock carries a 1.67 5-Y monthly beta, pays no dividend and trades at a $ 39.3 billion market cap.
The Dental Healthcare Industry
The global dental healthcare services market is displaying encouraging signs of growth and is expected to reach $ 700 billion, by 2030, forecast to grow at a CAGR of 6.3% for the 2020s decade, according to research. On a similar path, dental equipment and consumable sales are also expected to grow at a 6% + annual growth rate over the next decade. The global dental market is projected to grow from $ 29.63 billion in 2021 to $ 45.68 billion in 2028. The dental consumables and equipment market was severely impacted by the Covid-19 pandemic, with sales decreasing by 7.4% in 2020. Still, stronger demand and higher healthcare expenditure levels over the long term are expected to contribute to sustainable expansion in the industry.
A Growing Business
Align Technology’s business model revolves around designing, manufacturing and marketing dental medical devices. The company’s products are intended primarily for the treatment of malocclusion or the misalignment of teeth and are designed to help dental professionals (mainly orthodontists) deliver improved outcomes for their patients. Align’s Clear Aligners and the Invisalign System are the company’s most successful offerings, aiming to become the preferred choice for dental practitioners globally. To date, almost 10 million people have been treated with the Invisalign system. Align Technology Operates in two distinct operating segments: Clear Aligner and Imaging Systems and CAD / CAM Services. Clear Aligner is the larger segment, responsible for approximately 85% of worldwide net revenues.
Source: 2020 10-K
Over the past decade, Align has displayed significant sales growth through continuous digital innovation and increasing R&D spending. That is despite strong competition, both domestically and internationally, offering more traditional product solutions. Revenue and Net Income have grown at 23% and 28% CAGRs during the past 10 years, while Free Cash Flow growth presents an even stronger record, at 29% average annual growth over the same time period. Profit margins have also consistently displayed Align’s efficiency over the years. Gross margins have stood above the 70% level, while Net margins have seen more fluctuation, currently standing at a generous 20%.
Align Technology generates plentiful amounts of Free Cash Flow as well. FCF for 2021 amounts to over $ 900 million, with margins showing consistent growth over the past five years, despite some fluctuation at the start of the 2010s decade. In November 2021, the company also purchased $ 100 million of common stock through an accelerated share repurchase program, reiterating management’s commitment to increase shareholder value through buybacks.
Balance Sheet Strength
Align’s balance sheet picture is one of confidence-inspiring financial health. Current and Quick ratios of 1.3 and 1.1 should ease any short-term liquidity concerns. At the same time, the company’s very low leverage is another attraction point for investors. Align Technology has virtually no debt, with the company’s cash balance amounting to half of total Liabilities. With no interest payments to chip away from Net profits and no liquidity issues to worry about, Align can deploy its increasing cash balance towards acquisitions, share repurchases and Capital Expenditures.
By most valuation metrics, Align Technology is getting less expensive, although, in my view, the stock still has some ground to lose before it becomes fairly valued. Align’s P / S ratio has been cut in half over the past year, with the stock currently trading at a 10x multiple, that despite a strong growth record and potential can be considered a bit pricey. Even when considering projected 2023 sales, Align would trade at a forward 6.8x P / S multiple. What this likely shows is that forecasted growth has already been priced in the stock’s current valuation, perhaps even overpriced in the past, since even after the pullback valuation multiples remain high. The same goes for EV / EBITDA and P / FCF multiples, which as shown in the graph below, despite the recent pullback still trade at very generous levels.
After all things are considered, there is little doubt that Align Technology is a well-run business, that maintains strong growth prospects. A product range that is becoming increasingly popular, wide profit margins and a healthy balance sheet are just some of the attraction points for the stock. As the growth-value rotation continues and perhaps the market enters a deeper correction phase, ALGN should have a place on investors buying wishlists. Provided that a somewhat lower valuation is reached Align would present an attractive investment opportunity.