Growth Stocks: Align Technology

• Align Technology's second quarter results beat expectations with strong demand for its Invisalign tooth alignment system.
• The company is benefiting from several tailwinds, including international expansion, increased brand visibility, and increasing adoption of its brand as a benchmark in tooth alignment.
• The stock may rise higher with the potential for earnings to continue to surprise to the upside supported by a positive long-term outlook.

Align Technology Inc. (ALGN) is a manufacturer of 3D digital scanners and Invisalign clear aligners used in orthodontics. It is based in San José, California; manufactures the aligners in Juárez, Mexico and its scanners in Israel and China. ALGN is experiencing increasing demand for his market leading Invisalign tooth aligner system as an alternative to traditional braces, imaging hardware and specialized dental software. In fact, the stock rose more than 10% to a new all-time high in the report with management revising its guidance to the upside for the full year. While ALGN has already been a big winner this year and is highly valued, investor optimism about the stock is allowing it to earn a growth premium given the long history of growth opportunities and strong fundamentals overall. Accelerating momentum in international markets along firmer margins may further drive its price rise.

Summary of ALGN results

This was a very positive quarter for Align Tech with an EPS of $ 2.51, beating expectations by $ 0.33 and reversing the loss of - $ 0.52 in the second quarter of last year due to some outages related to the pandemic. Revenues of $ 1 billion were up 187% year-over-year and also a 13% higher sequentially compared to the first quarter. Revenues were also 66% higher than in the second quarter of 2019 as a benchmark before the pandemic.

Among financial metrics, the 75% gross margin was slightly lower than the 75.7% in the first quarter based on some variability in the average sales price and higher shipping costs. However, the trend has been positive considering that gross margin has increased from 71% in 2020. Favorably, Align Tech has kept costs under control with the increase in total operating expenses by 65% ​​YoY below the growth of top-of-the-line revenue, helping drive profitability. Although the company continues to invest in R&D and spend on marketing, the operating margin of 26.6% increased 140 basis points from 25.2% in the first quarter.

Within sales figures, core Clear Aligner product reached $ 841 million in revenue up 11.6% QoQ with a similar 12% QoQ increase in package shipments to 665,600 units, from 78,600 in Q1 . This is important as it suggests a new base of prescribing physicians who will effectively distribute more products in the future like a tailwind of growth. It is worth mentioning that the proportion of boxes sent to international markets is leading the growth and represents more than 51% of the total business. The company is also seeing the push for teen use as a growth category.

A key issue here is the push for imaging systems and software services. These are the combination of hardware kits sold to dental offices for intraoral scanners and computer aided design to support customization of the aligners. Systems and services sales reached $ 170 million, an increase of 200% year-on-year and 20% from the first quarter. The segment helps diversify Align Tech's operation, which now accounts for 17% of total revenue, up from 15% in the period last year.

Align Technology recently introduced its next generation "iTero Element 5D" system with more advanced features and automatic functionality. The system allows for digital aligner customization compared to the alternative mold-based method taken by dentists and orthodontists who are incentivized to order the equipment. Tens of thousands more scanners are expected to be deployed over time.

Finally, the company ended the quarter with $ 1.1 billion in cash and equivalents against zero long-term financial debt. We consider the balance sheet as a strong point in the investment profile of the company. FCF in the second quarter reached $ 193.3 million, supporting the company's $ 1 billion share buyback program announced in May, which will improve financial ratios. The latest update is that $ 900 million remains under the authorization.

Management perspective and market expectations

Senior management is setting the target for full-year revenue between $ 3.85 and $ 3.95 billion, revised up from the median target of $ 3.8 issued during first quarter results. The company also expects to buy back an additional $ 75 million in shares during the current third quarter under its share repurchase agreement.

According to consensus estimates, the revenue forecast for 2021 at $ 3.9 billion, an increase of 59% year-on-year, is in line with the company's guidance. The market expects EPS to reach $ 10.94, which is a 108% increase over 2020. Looking ahead, estimates are that growth will average around 19% for 2022 and 2023 and earnings will increase. in a similar amount each year up to EPS of $ 15.88 by 2023.

Can the evolution of the figures of ALGN be estimated?

Every year there is a new group of teens who become potential Invisalign users, representing a tailwind of organic growth for future sales. Currently, proposal volumes submitted to teens worldwide only account for a third of the business, while the potential is for it to surpass adult users as the largest segment. There is a rise for the company that Invisalign could become the standard for orthodontic treatment, while traditional fixed braces are considered simply the legacy solution.

In terms of market direction, Align Tech argues that 15 million people in major developed countries choose the treatment directly recommended by orthodontists around the world, and more than 13.5 million could be potential consumers of the Invisalign system. In addition, there are 500 million people worldwide with malocclusion, which is an imperfect alignment of the teeth and which also represents potential clients. In other words, compared to the 307,000 boxes shipped over the past year, the company has only scratched the surface of all the potential in the market.

In valuation terms, ALGN is currently trading at a forward P/E of nearly 57x, which is above the upper range of its historical average for this metric. That said, the multiples are reduced to 40x by 2023 based on the estimated revenue forecast. So this growth potential is justified not only based on current growth trends and increased profitability, but also on long-term sales visibility. Data on new physicians recommending and selling Invisalign for the first time each quarter will likely increase the number of clients over time as a clue to revenue and profit. Related services and the impact of marketing activities can work to capture a larger share of the addressable market. The broader brand drive, including connecting with teens and children, remains an under-penetrated segment for the company in various markets and therefore one of its greatest opportunities.

Technical analysis

Since reaching its previous ATH in 2018, the company has not had a positive stock market performance, due to high production costs and market penetration pending development. However, since the pandemic, consumers have seen the opportunity to meet a need that they had yet to fulfill. Confinements have allowed that in the absence of social interaction, we have increased our personal care, and dental treatments have been no exception.

source: xStation

Since the lows reached during the strong sale in early 2020 motivated by the pandemic, the company has performed spectacularly with a profit of more than 450% in just 18 months.

Currently it is on track to test the maximum projected by the fibo retracement of 161.8% from the ATH of 2018 and the minimum of March 2020. Placing the objective in the environment of $ 800 per share, technically at $ 814.

Darío García, EFA
Analista de XTB