We think that Align Technology Inc. (NASDAQ:ALGN) currently is a better pick compared to Motorola Solutions Inc. (NYSE:MSI). Both companies have a similar market capitalization of around $50 billion, but Align stock trades at 14x trailing revenues, more than double that of MSI, whose P/S multiple stands at around 6x. Does this gap in the companies’ valuations make sense? We believe it does, and we only expect this gap to widen. While both companies have seen a strong rise in revenues since the lockdowns started being lifted, ALGN has seen more rapid and consistent growth over the past five fiscal years than MSI. Align’s revenues have grown more than 3x since FY ’16 and currently stand at $3.8 billion on an LTM basis. At the same time, MSI’s sales have risen from $6 billion in FY ’16 to $8.1 billion on an LTM basis. Additionally, Align’s LTM EBIT margins stand at 26.7%, higher than MSI’s 20.6%.
Having said that, we dive deeper into the comparison, which makes Align Technology a better bet than Motorola Solutions, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard Motorola Solutions Inc. vs Align Technology: Similar Market Cap, But Align Technology Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. Align Technology Ahead On Revenue Growth
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Both companies managed to see sales grow during the pandemic, but Align has witnessed faster and more consistent revenue growth over the years. Align’s sales have jumped from $1.1 billion in FY ’16 to $3.8 billion on an LTM basis, while MSI has seen revenues grow from $6 billion to $8.1 billion over the same period, much slower than the rise in Align’s sales.
Additionally, Align’s pre-Covid annual sales growth stands at 30.8%, higher than MSI’s 9.4%, whereas growth during Covid, too, stands at 2.7%, much better than MSI’s -6%. A look at recent trends reveals that Align witnessed 38.4% YoY sales growth for its most recent quarter (Q3 ’21), 3x more than MSI’s 12.8%.
Finally, LTM and last three FY sales growth for Align stands at 64.2% and 19.5% respectively, much more than MSI’s 8.1% and 5.5%.
2. EBIT margins: Align Technology Ahead; And Also In A Better Cash Position
Align’s P/EBIT ratio stands at around 51x currently, much higher than MSI’s 27x. However, Align’s LTM EBIT margins currently stand at 26.7%, higher than MSI’s 20.6%, and Align is also ahead in terms of LTM margin change compared to the last three fiscal years, with 6.5% growth vs MSI’s 1.9%.
Looking at both companies’ cash position, too, MSI’s debt as a % of equity stands at 12.7%, vs Align’s 0%. Additionally, MSI’s cash as a % of assets stands at 14.5%, less than that of Align’s 21.9%.
3. Finally, Align Technology Is Ahead In Terms Of Expected Returns
Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Align Technology is the better choice. Align’s LTM revenues of $3.8 billion are expected to rise at a CAGR of 17.1% as per our estimates, taking revenue numbers three years out to as high as $6 billion. Assuming Align’s P/S ratio to pull back to around 11.9x, this still means that the market cap would rise to $72 billion, an upside of 40% over three years.
In comparison, given historical trends, we expect MSI’s sales to rise slower at a CAGR of 6.9%, taking revenue in three years to $10 billion. Considering the P/S for MSI to also pull back to 4.5x, we estimate a market cap of $45 billion for MSI, roughly the same level it is at today.
The Net of It All
Despite MSI’s revenues being larger than that of Align’s, the latter has seen faster and more consistent revenue growth lately, and also has better EBIT margins and a stronger cash cushion. Additionally, our comparison of the post-Covid recovery above, shows that Align has shown a much stronger growth than MSI. Due to this, we believe that Align deserves its higher P/E and P/EBIT multiple compared to MSI, and we believe that this gap in valuation may only widen. As such, we believe that Align Technology stock is currently a better bet compared to Motorola Solutions stock.
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|S&P 500 Return||1%||26%||112%|
|Trefis MS Portfolio Return||2%||47%||297%|
 Month-to-date and year-to-date as of 12/27/2021
 Cumulative total returns since 2017