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About Align Technology

If you didn’t already know, people care about their teeth and the smiles they put out into the world.

A lot.

And it makes complete sense.

An initial smile can be the beginning of a beautiful, lifetime connection that blossoms into an even more significant relationship and it really is sad to think that there are people out there that are so ashamed and/or embarrassed of the condition of their teeth that they avoid smiling at all costs.

It is just one of those utmost sensitive sore spots that can indefinitely crush someone’s confidence and their perspective of themselves, and while we don’t necessarily think the mission aspect of a business should be the most important thing (simply because if you can’t make a sustainable business out of it the furthering of the mission will come to a screeching halt and be no more), we do certainly enjoy to find that even some of the world’s largest companies are on distinct missions and paths in helping the world one person at a time, or in this particular case, one smile at a time.

This just so happens to be what San Jose, California-based Align Technology does, as it may seem like sort of a generic technology company given its title, however, most would instantly know this company through its ever so treasured subsidiary, Invisalign, which for those who don’t happen to know what this branch of the business is or does, it is essentially the company that pioneered invisible braces, which have become an absolute sensation, especially with the younger audiences, as clunky, silver-filled braces carry a lot of stigma and can, again, obliterate someone’s self-esteem and Invisalign is the premier solution to this problem, offering almost the identical treatment and assistance that traditional braces provide but through a seemingly invisible, completely transparent method through their Invisalign brand.

Braces and teeth straightener mechanisms but invisible to the world.

Therefore, it is hardly any sort of secret that Invisalign (and Align Technology, of course) generates a great deal of its revenues through the development, production and sale of its orthodontic products to, you guessed it, teeth doctors, or better yet, orthodontists as well as dentists, which is largely good in the sense that regardless of the state of the greater overall economic landscape (be it domestically, nationally or globally for that matter), folks will opt to keep their pearly whites, well, pearly and white and where else would they go but to their local dentist or orthodontist’s office, especially as the younger generations most definitely value feeling good while also looking good, lending Align’s general business model as being fairly resistant to recessionary pressures and poor economic backdrops, as my peers are far more likely to cut other expenses before even coming close to cutting corners with their smile and their looks in general.

Oh yeah, and this company has a good amount of patents, which is generally a very good thing, especially for a company that has seemingly spearheaded a brand new category within the dental sector and with that, has a lot of valuable intellectual property (IP) to protect.

Now that some of the key points regarding Align, its business model and our general opinions regarding the company in the context of a recession have been dealt with, let’s learn more about this company from a financial perspective in hopes of ultimately determining whether or not this company’s stock (NASDAQ: ALGN) is worth its weight in teeth.

I mean gold.

Align’s stock financials

In kicking things off with Align, the company presently maintains a market capitalization of $20.99 billion along with a corresponding share price of 274.00, along with an annually distributed dividend of zilch offered to its shareholders as well as a prevailing price-to-earnings (P/E) ratio of 58.68, initially indicating that this company’s stock is trading way ahead of itself, as it is commonly held that a price-to-earnings ratio of 20 indicates that a company’s stock is trading at exactly fair value, or what it is worth paying for today, and subsequently any P/E value greater than 20 implicates a company’s stock of being overvalued relative to its actual, intrinsic worth.

This, of course, is usually a bad thing, as hardly anyone is ever just dying to overpay for a company’s stock, however, at times, a loftier price-to-earnings ratio can be justified with some form of consistent and strong year-over-year (YOY) revenue growth, as this could at times justify overpaying for a company’s stock, given that if the growth prospects remain strong and the company can continue growing revenues while gobbling up market share, it doesn’t feel as though you are overpaying that much anymore, rather, you are paying a proportionate price for the growth prospects on the horizon.

While we will certainly offer our two cents on the matter given the figures we are going to be diving into momentarily, in the interest of pure objectivity, given the information we have at the moment (which admittedly is not a whole lot), Align Technology’s stock (NASDAQ: ALGN) is overvalued until proven otherwise.

With respect to the overall condition of the company’s balance sheet, Align’s executive team is tasked with monitoring and properly deploying almost $6 billion in terms of total assets along with around $2.3 billion in terms of total liabilities, which is a great sign in this context given that the company seemingly has a sufficient amount of total assets relative to its total liabilities, affording a comforting amount of asset-to-liability coverage, giving us some confidence that this company can continue growing and expanding its portfolio through internal initiatives but also through external ones, for instance, through some calculated strategic acquisitions that it can evidently afford to make.

On the balance sheet front, we maintain no major complaints for the time being.

Regarding the company’s income statement, Align’s annual revenues (specifically referencing since 2018) have been trending in the right direction, for the most part, starting at just under $2 billion in 2018 and generally rising year-over-year to its latest reported figure (as displayed on TD Ameritrade’s platform) of $3.7 billion (2022), which is certainly a point of attraction, however, on this basis alone we do not think this is enough sales growth to justify overpaying over thirty points (on the basis of its aforementioned price-to-earnings ratio) for an ownership stake in the company through its common stock.

Regarding the company’s cash flow statement, during the same 2018-2022 time period, both Align Technology’s net income and total cash from operations have remained positive, even throughout the woes throughout and following COVID-19 and global supply chain issues as well, which is yet another marked positive favoring Align and its ability to turn sales into cash in a consistent manner, with, for example, the company’s total cash from operations ranging from a relative low of $555 million (2018) and a high of nearly $1.2 billion, as reported in 2021.

Much like how James Harden likes to take his stepback jumpshots, we like this range.

Align’s stock fundamentals

While still somewhat on the subject of cash and profitability, it can be found on TD Ameritrade’s platform that Align’s trailing twelve month (TTM) net profit margin is pegged at 9.53% to the industry’s listed respective average of 5.28%, of course insinuating that the company in question has some pricing power with the consumer and against its competitors as well, as it is apparently able to extract a greater amount of profit from the products and services it offers than those of the competition, on average, which is what we always hope to find in a category leader.

As it relates to the company’s core TTM returns on both assets and investments, Align’s are once again listed as being in competitive forms (also according to the figures displayed on TD Ameritrade’s platform), with its TTM return on assets standing at 5.93% to the industry’s respective average of 6.18%, not to mention that its TTM return on investment is listed as 8.74% to the industry’s average of 7.57%, technically losing one and winning the other, however, irrespective of outcome, Align has clearly remained quite in line with the industry’s averages, which is definitely not a negative or a bad sign, as we are sure that this dental niche is highly competitive in nature.

Should you buy Align stock?

Apart from this company’s foundational mission and the multitude of audiences it serves and quite literally puts smiles on their faces, we must always be rooted in the facts of the matter and this company’s current valuation remains a sticking point for us, as, sure, the company’s recent total year-over-year revenues have technically been growing at a good rate, we do not deem them to be growing at a rate fast enough to warrant overpaying this much for a stake in Invisalign and Align Technology as a whole.

Nevertheless, we are surely going to be waiting when this company’s stock (NASDAQ: ALGN) comes down to much more favorable, investable levels, as Align Technology’s balance sheet is in great shape, its revenues are generally trending in the right direction (literally), its cash flows are definitively positive and its TTM net profit margin and aforementioned return metrics are quite competitive with that of the competition’s averages.

But for the time being and in the interest of staying objective and not tacking on risk where we don’t feel as though it is necessary, also incorporating the current state of the economy and stocks across the board recently hitting all-time highs, we offer this company’s stock a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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