(Align Technology) (ALGN)
Overview of the Company - Align Technology is responsible for Invisalign clear aligners and its technology. They also have another part of their business in producing medical devices for orthodontists and dentists. Their business also includes the software that come with the Invisalign clear aligners for companies to purchase in tandem.
Fundamental Analysis - Align has shown through their recent earnings that there is so much room for growth for the company, and they are doing so at an increasingly large rate. More and more people are taking care of their teeth and will need Invisalign aligners to do so. Everyone has teeth that they will need to take care of - Align is in a great position right now in the market.
How (ALGN) Stacks Up to Competitors - I will be comparing Align to other medical devices companies like Medtronic (MDT), and Stryker (SYK). Medtronic is the largest of these companies with about a $165 billion market cap and $100 billion for Stryker. Align has a market cap of less than $50 billion. Additionally, Align looks to be the most expensive at first glance looking at P/E ratio, while Medtronic and SYK have similar P/E’s. Align is the leader in profitability and return on assets out of the group. Also, quarterly revenue growth (yoy) is much higher than both MDT and SYK, but it is noteworthy that SYK does have a sizable lead on Medtronic. The story continues as Medtronic trades much closer to book value than Styker and Align, it is clear that Align is the most expensive, but has the best growth. Stryker seems like a middle between the two.
Bull Case - Align is in a limited growth market as there will only be a limited amount of kids and potential customers to sell their products to. However, as awareness about teeth health grows and teeth hygiene becomes more popular, Align may be able to reach out to more and more customers.
Bear Case - Align trades too much like a technology company. The valuation has priced in too much growth into the company when there really isn't any. New customers will come, but the flow will be slow and stable. Align trades at almost a 70 P/E making it more expensive than all of FAANG. Align will have to post incredible earnings growth to be able to support their valuation. Even if they do, there has to be an added catalyst to push the stock higher, after they first support their valuation.
Valuation and My Price Target - Align does have to post substantial earnings growth for the stock to appreciate. Well, after we saw the number tonight, I think it's safe to say that Align will meet their expectations and more. With $2.87 for their EPS number during quarter Q3 compared to the $2.50 expected, we can assume that the next year EPS should be $11.50. I think with continued growth, Align will prove that it is worth paying about 65x earnings. This brings me to a price target of around $750. This indicates about 24.5% returns. However, with the move after hours and the stock trading around $650, the return will be lower than the 24.5% expected (15%) if purchased at $600.
The Verdict - BUY HOLD SELL
Everyone needs to take care of their teeth and as more and more people choose the industry leaders in Invisalign, Align Technology will reap the benefits. They are also able to make a large amount of money from this business, not only do they have demand but they are also making a very good margin off of each new customer as well. With year over year revenues up almost 40% and its imagery technology business booming, it is clear that Align deserves its valuation. With an estimated annual return of 24.5%, this stock is attractive - if you can get it around $600 a share. If the after hours price action continues, returns will drop to 15%, assuming you get in at $650. I like this stock as a buy, as long as you're able to get in around $600. I think that is a logical entry point. For now, I believe Align is a HOLD.
*all data provided by yahoo finance and nasdaq.com