After A 3X Rise Align Technologies Stock Looks Expensive

ALGN: Align Technology logo
ALGN
Align Technology

After a whopping 3x rise since the March 23 lows of this year, at the current price of around $458 per share we believe Align Technologies stock (NASDAQ: ALGN), best known for its Invisalign dental solutions, has reached its near-term potential. ALGN stock has rallied from $138 to $458 off the recent bottom compared to the S&P which moved 48% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. ALGN stock is also up 106% from levels seen in early 2018, two years ago.

Some of the 106% rise of the last 2 years is justified by the roughly 63% growth seen in Align Technologies revenues from 2017 to 2019. Also, the company saw a slight decline in total shares outstanding, resulting in a 64% growth in revenue per share (RPS) to $30.22 in 2019, compared to $18.40 in 2017. Despite the growth in RPS, the company’s P/S Multiple saw a slight contraction. We believe the stock is likely to see downside after the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 106% Change in Align Technologies Stock between 2017 and now?‘, has the underlying numbers.

Align Technologies’ P/S multiple changed from 12x in 2017 to 9x in 2019. While the company’s P/S is 15x now, there is a potential downside risk when the current P/S is compared to levels seen in the past years, P/S of 8x at the end of 2018, and P/E of 9x in 2019.

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So what’s the likely trigger and timing for downside?

The global spread of Coronavirus has meant that fewer people are visiting dentists at the moment for non-emergency procedures such as aligning their teeth, causing demand for Align Technology’s popular Invisalign solutions to plummet in Q2. That said, the company recently announced its Q3 results, which were much better than estimates, led by a rebound in demand for dental care. Total revenue increased 21% y-o-y to $734 million, while the adjusted earnings of $2.25 per share reflect a 52% growth over the $1.48 figure reported in the prior year quarter. Align saw a sharp rebound in sales for both – Invisalign clear aligners and iTero imaging systems – after ease of restrictions resulting in doctors ramping up their practices. That said, much of these factors appears to be priced in the current stock value of $458, despite the expected recovery in demand post Covid.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $458, ALGN stock is trading at 15x its 2020 expected RPS of $30.57, and 11x its 2021 expected RPS of $41.10. This compares with P/S of 8x and 9x seen in 2018 and 2019 respectively, making the stock appear vulnerable to downside risk.

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