Align Technology stock (NASDAQ: ALGN), best known for its Invisalign dental aligners, currently trades at $300 per share, 45% below the level seen in March 2021, and it looks undervalued. ALGN stock was trading at around $237 in early June 2022, just before the Fed started increasing rates, and is now 26% above that level, compared to 13% gains for the S&P 500 during this period. The rally in the stock over recent months has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession.
Interestingly, ALGN stock has had a Sharpe Ratio of 0.5 since early 2017, slightly lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Returning to the pre-inflation shock level of $730 (seen in Sep 2021) means that ALGN stock will have to gain more than 140% from here, and we don’t think this will materialize anytime soon. That said, ALGN stock trades at 6x revenues compared to its last five-year average of 13x, implying that the stock is way below its historical valuation multiple average. The company now faces increased competition from the likes of SmileDirectClub, among others. This may result in revenue growth slowing in the coming years, and, as such, a decline in its P/S multiple makes sense. However, the gap between the current and historical average looks steep, and we believe that investors can use this dip to buy ALGN for solid long-term gains.
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Our detailed analysis of Align Technology’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply
- April 2021: Inflation rates cross 4% and increase rapidly
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declines more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
- October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
- Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains on the cards.
In contrast, here’s how ALGN stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index.
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08).
- 3/1/2009: Approximate bottoming out of S&P 500 index.
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008).
ALGN And S&P500 Performance During 2007-08 Financial Crisis
ALGN stock saw a 75% decline from $27 in September 2007 (pre-crisis peak) to $7 in March 2009 (as the markets bottomed out). It recovered sharply after the 2008 crisis to levels of around $18 in early 2010, rising 2.6x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
Align Technology’s Fundamentals Over Recent Years
Align Technology’s revenue rose 54% to $3.7 billion over the last twelve months, compared to $2.4 billion in 2019. International expansion and an increasing installed base of iTero scanners have driven Align Technology’s revenue growth. While the company saw robust revenue growth in recent years, it saw its operating margin contract from 23% in 2019 to 14% now. This decline can be attributed to increasing direct costs, partly due to inflationary pressures. Our Align Technology’s Operating Income Comparison dashboard has more details.
Does ALGN Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
Align Technology’s total debt of $100 million is trivial compared to its market capitalization of $23 billion. The company has a cash balance of around $1 billion and has garnered $0.9 billion in cash flows from operations in the last twelve months. Given its solid debt and cash position, the company is in an excellent position to service its near-term obligations.
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe ALGN stock has the potential for gains once fears of a potential recession are allayed. That said, the concerns over increasing competition and slowing economic growth remain key risk factors for realizing these gains.
While ALGN stock looks like it can see higher levels over time, it is helpful to see how Align Technology’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-5%||11%||91%|
|Trefis Reinforced Value Portfolio||-7%||22%||527%|
 Month-to-date and year-to-date as of 9/27/2023
 Cumulative total returns since the end of 2016