At the start of the month, I believed that expectations in the case of Align Technology, Inc. (NASDAQ:ALGN) were running too hot again. The share price of the serial growth company has seen a real boom-bust cycle since the pandemic, as optimism in its share price over the summer seemed a bit misplaced, with the operational performance lagging this year.
Given the fact that I have covered Align more extensively earlier this month, I will quickly summarize the main points, before diving into the selloff which has resulted from a weaker set of quarterly results. Results show softer growth and earnings trends, as this observation in combination with a rapidly falling share price rapidly improves appeal, but do not create an appealing situation yet.
Some Perspective
Founded in 1997, Align was granted clearance by the FDA a year later for its key Invisalign system. The company went public subsequently as a single dollar stock in the early 2000s, rising to the $10 mark by 2010, before shares rallied to levels in the $300s in 2018.
The great momentum was driven by the success of the business, with the Invisalign being a comfortable, cheaper, and (nearly) invisible solution to treat mild misalignment of teeth compared to alternative methods. With the business having grown to a $2.5 billion sales base by 2020, when the business posted earnings of $5 per share, it was clear that valuations were high, with shares trading around the $300 mark.
What followed was a huge momentum rally as shares rose to levels above the $700 mark in 2021, as the business saw strong performance coming out of the pandemic. 2021 revenues rose sharply to $4 billion on which GAAP operating profits of nearly a billion were reported, with GAAP earnings posted at $10 per share, as the company held over a billion in net cash.
After posting strong growth in 2021, comparables were becoming more difficult in 2022. First quarter sales rose 9%, they fell 4% in the second quarter, and were even down 12% in the third quarter, weighing substantially on margins as well. In the end, 2022 sales fell 5% to $3.7 billion, with GAAP earnings down to $4.62 per share, while adjusted earnings came in at $7.76 per share.
With no guidance provided for 2023, the company started the first quarter with a 3% fall in sales, as second quarter sales rose by 3% to $1.00 billion. With 77 million shares trading at $305 early in October, the company was granted a $23.5 billion equity valuation, a number which included a billion net cash position.
The resulting $22.5 billion enterprise valuation combined with earnings power seen around $5-$6 per share meant that valuations were very demanding. This was even the case as its challenger SmileDirectClub filed for bankruptcy in September.
The Results
In the time frame of just three weeks, shares of Align have fallen nearly 40% to $190 per share. Shares had fallen to the $230 mark already in general trading, but fell below the $200 mark overnight upon the release of the third quarter results.
Third quarter sales actually were reported up 8% to $960 million, with all the growth due to rising volumes, and pricing being pretty flat. Adjusted earnings rose fifty-one cents to $2.14 per share, but were down 8 cents on a sequential basis. That said, most of the difference from a $1.58 GAAP earnings per share number was due to stock-based compensation expense, making the GAAP numbers more realistic here.
With the shares count down to less than 77 million shares, the market value has fallen to $14.6 billion, or $13.4 billion if we factor in net cash. With realistic earnings power trending at $6 per share, earnings multiple remains demanding, but at 30 times they have come down a long way.
The reason for that has to do with the guidance, as fourth quarter sales are seen down to $920-$940 million. The company cites a more challenged macro environment, a strong dollar (which seems a bit of an excuse), longer sales cycles and potential supply chain issues due to the unrest in the Middle East. Note that the revenue guidance actually marks growth from a $901 million sales number posted in the fourth quarter of 2022, so the words are perhaps tougher than the actual results.
And Now?
The reality is that the third quarter growth and earnings picture looks quite alright, and while the company warns for softness in the fourth quarter, it still would translate into revenue growth.
Reasons for caution are understandable, as Invisalign is indeed somewhat of a luxury item and thus demand is related to macro spending. With shares down a lot, shares are below 4 times sales, as the business still posts solid margins.
Hence, while the value of Align Technology, Inc. is much better than it has been for a long time, I still find it too early to buy based on a $6 per share earnings number. Therefore, I require shares to sell off further towards the $150 mark before getting aligned with the stock.
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