ALGN - Align Technology: Expectations Run Hot(ter) Again

2023-10-02 11:33:14 ET

Summary

• Align Technology, Inc. shares saw a significant pullback in 2022 after a boom in 2021.
• The company's performance has stabilized, but the current valuation is not appealing.
• Align is on track to generate $4 billion in sales this year, but earnings power falls short of 2021 levels, and short of levels to see appeal here.

In November of last year, I was not aligned with shares of Align Technology, Inc. ( ALGN ) . This came after shares saw a near unexplainable boom during 2021 and witnessed a subsequent 75% pullback towards the end of 2022.

While the company saw growth in 2021, it was not too impressive, and even as earnings pressure was seen, fundamental support came in sight. With the benefit of hindsight, last year provided an excellent entry opportunity.

The performance to date has shown stabilization, both in terms of sales and earnings, as shares have seen a huge recovery, one which has eliminated all the near to medium-term appeal, making me cautious to get involved here.

A Recap

Founded in 1997, Align obtained FDA clearance for its Invisalign system a year later. The company went public subsequently, as this was the start of a multi-year shareholder value creation run. A single-dollar stock in the early 2000s traded around the $10 mark in 2010, after which the real value was created for investors.

This came as consumers were very pleased with the solution in case of mild misalignment of teeth, with Invisalign being more comfortable, cheaper than alternatives, while it is (nearly) invisible as well. Over the years, the company had grown the business to a $2.5 billion sales base in 2020, while the company posted earnings at $5 and change per share, marking strong results despite the outbreak of the pandemic that year.

With the pandemic on its retreat, accelerating growth was seen in 2021, as revenues rose to $3.95 billion on which GAAP operating profits of $976 million were reported, with net earnings of $772 million coming in just thirty cents shy of the $10 per share mark. Moreover, the company held a net cash position of $1.3 billion on top of that earnings power as well.

Needless to say, valuations were very high as shares rose from $300 pre-pandemic to a peak of $700 in 2021, trading at roughly 70 times earnings after a very strong year. Sales growth numbers around 60% in 2021 were hard to replicate, as the strong growth created tough comparables going forward.

After first quarter sales for 2022 rose by 9%, they fell 4% in the second quarter and some 12% in the third quarter that year, weighing on margins as well. This had a massive impact on profitability, with earnings trending closer to $5 per share as net cash was down to $1.1 billion. Trading at $180, the unleveraged business traded at $165 per share, for a 33 times earnings multiple, based on earnings power being cut in half.

That was a bit too shortsighted as earnings power around $10 per share just before 2022s margin pressure would have revealed a very fair valuation, with shares trading in the $180s in November 2022. Moreover, Align still held a substantial net cash position as not only the company was buying stock, its executive Joe Hogan did the same.

A Recovery Trade

Trading in the $180s last fall, shares have seen a huge recovery, trading at $350 per share in February, with shares essentially doubling in just a quarter of a year. Ever since, shares have largely traded in a $300-$400 range so far this year, now trading at $305 per share.

In February, Align posted its 2022 results with sales down 5% to $3.7 billion, a year in which GAAP earnings were cut in half to $362 million, equivalent to $4.62 per share, as adjusted earnings fell by 32% to $7.76 per share. The company failed to provide a 2023 guidance on the back of the uncertainty in the business environment, but saw stronger trends, with adjusted operating margins seen around 20% in 2023, largely similar to 2022.

A couple of days later, Align posted a $250 million accelerated share repurchase agreement, as these trends made that shares rise above the $300 mark.

In April, Align posted a 3% fall in first quarter sales to $943 million, with 4% fewer clean aligner systems being shipped at 575k units. Adjusted earnings fell forty-three cents to $1.82 per share, with GAAP earnings reported at $1.14 per share, with the vast majority of the difference between earnings metrics being due to stock-based compensation expenses.

In July, Align posted a 3% increase in second quarter sales to $1.00 billion, with adjusted earnings up seven cents to $2.22 per share, as GAAP earnings improved two pennies to $1.46 per share. The company still posted a net cash position of $1.03 billion, although it came down a bit following the accelerated buyback program. This valuation compares to 77 million shares trading at $305 here, granting the business a $23.5 billion equity valuation, or $22.5 billion enterprise value.

With Align Technology earnings realistically trending at just $5 per share, as the fundamental performance is in line with my take last year, it is clear that multiples have expanded a great deal, and quite frankly there was a massive buying opportunity this time last year.

Some Other News And Thoughts

In September, Align announced a bolt-on deal for Cubicure GmbH, a pioneer in direct 3D printing solutions for polymer additives manufacturing capabilities. The EUR 79 million deal is designed to create more expertise within Align in order to scale 3D printing operations to the business line-up.

Moreover, its former challenger SmileDirectClub ( SDC ) filed for bankruptcy late in September, as Align might benefit from the fact that it might lose a competitor, although by now SmileDirectClub has not been much of a formidable competitor of course.

At this point in time, Align is on track to generate about $4 billion in sales this year, and it is well-aligned in the long run, driven by the desire of people to spend more (time and money) on their teeth, a trend which is furthermore visible in developing countries.

The big issue with Align Technology, Inc. is that current earnings power comes in way short compared to the 2021 performance, and even if the company could again post similar earnings numbers as it did in 2021 (which is a huge if at this point in time) valuations have expanded hugely with shares now trading at $300 and change.

Given all of this, Align Technology, Inc. stock seems to be (more than) fully valued here, and while shares were not aligned this time past year, which happened to be a huge buying opportunity, I feel no urge to get involved with the shares at this point in time.

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