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Why Align Technology Shares are Crashing

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Shares of Align Technology (Nasdaq: ALGN  ) are dropping hard in after hours trading, falling nearly 20% after hours following the release of preliminary third quarter results that missed expectations and provided guidance well below expectations. 

The company, known for its Invisalign dental appliances for the treatment of misaligned teeth, posted revenue growth of 8.4% relative to Wall Street expectations of 11.3%. Earnings also missed expectations by $0.01. Management blamed the miss on "more pronounced" summer seasonality. While excuses like this should always be taken with a grain of salt, in this case investors should drop the table variety and go straight for the rock salt. That's because management also noted that weakness persisted into October, leading to  pitiful fourth quarter guidance. 

To make matters worse, the company is initiating a goodwill impairment test related to last year's $190 million acquisition of Cadent, a maker of 3-D scanning systems used in dentistry and orthodontics. The reason for the impairment test is a combination of ongoing weakness in business trends (sales fell 16% for the unit this quarter) combined with the discontinuation of an important distributor agreement. 

Today's news isn't a death sentence by any means. Align is still a solidly profitable business with a strong niche business, and a future goodwill impairment charge wouldn't effect actual cash earnings. However, with the stock up nearly 50% year-to-date and over 100% in the past twelve months, it's clear that Align shares were prices for perfection after beating Wall Street estimates handily in recent quarters. 

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Brenton Flynn has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Related Tickers

10/25/2016 4:00 PM
ALGN $87.50 Down -1.76 -1.97%
Align Technology CAPS Rating: ****