In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Motley Fool Pro and Options' Jeff Fischer first reflect on the excellent arc of orthodontic tech company Align Technologies (ALGN +0.49%).
It was a Rule Breakers recommendation back in June 2014, and so far, it's more than justifying that pick, in large measure due to its international growth. Then the guys switch to social media, where we learn that Twitter's (TWTR +0.00%) strong third quarter has brought it almost to profitability. Can it get there, and where does it go from here?
A full transcript follows the video.
This video was recorded on Oct. 27, 2017.
Chris Hill: Align Technology's third-quarter profits came in higher than expected, and shares of Align up more than 16% on Friday. Big day, Matty.
Matt Argersinger: Huge day. This is such a great example of an early, small Rule Breaker who owned a niche market within the medical industry, and has just skyrocketed and become a standard and it go-to brand. I was looking back at the Rule Breakers recommendation which I wrote up in June 2014 for Align Technology. And at that point in time, they were growing revenue year-over-year between 15-20%, depending on which quarter you looked at. Flash forward to today, revenue in the most recent quarter up 38%, and the core Invisalign business up over 40%. Total example of a product that has just caught fire. Earnings up over 60%, both those numbers crushing estimates. The big deal for Align, and we've been looking at this, is the rapid expansion they've had overseas. Invisalign not only has become the go-to place for braces for aligning teeth here in the U.S., but it's really being adopted overseas, especially in the Asia-Pacific region, where they're seeing incredible growth. It's an expensive stock at $230 per share, but I thought it was expensive around $50 a few years ago, and it's trading at roughly the same multiple.
Jeff Fischer: And Invisalign is expensive itself, so, there you go, good margins.
Hill: Are they talking at all about expanding outside the mouth? Or just, we're going to focus on this for now?
Argersinger: I think it's all about the mouth right now, but they do have some things, other types of dental technologies they're looking at. But, no, they're staying in the mouth.
Fischer: What are you thinking, Chris? What else could they align? [laughs] The spine?
Hill: [laughs] Possibly. Team up with some chiropractors, get some R&D going on in that. For the first time in a very long time, it was a great week for Twitter. Shares up 20% this week after a strong third quarter report, and they raised guidance for the fourth quarter. They're not profitable yet, Jason, but they're getting darn close.
Jason Moser: Yeah. What do they say, a broken clock, and all that good stuff? I mean, at some point or another, the statistics, you just had to believe a good quarter was going to happen.
Hill: I thought you'd be a little more excited about this.
Moser: I am excited, I just think we need to look at this from a practical viewpoint. I think there was probably a little bit of a short squeeze involved with the stock's run up on Thursday and Friday. Now, with that said, it does appear that management's efforts to get the growth engine going again are starting to pay off. You look at daily active users, that was up 14%. Fourth consecutive quarter of double-digit growth there. They've redefined their advertising landscape with some different offerings and products that focus more on the video front that they're making all of these investments in. So, ad engagements doubled, the cost per engagement down 54% from a year ago, and data licensing is becoming a bigger part of the business at about 15% of revenue today and growing very fast. So, this all put together gives us a company where they very well may be gaap profitable here at the end of the year. And I think once it becomes gaap profitable, then we can look at it from a more fundamental sort of point of view in regard to valuing the stock. And I think it's important to note that they do finally now have a leadership trifecta in there with Dorsey and Noto and new CFO Segal. So, perhaps that will help keep this company moving forward. We want to see at least one more quarter of performance like this so that we can call it a trend, as opposed to, it could very well just be an outlier. We'll wait and see.
Fischer: And Twitter still gets such a tiny percentage of the dollars being spent on online advertising compared to Google and Facebook. They're not even in the same ballpark. So, you can do that as a positive, there's a lot of outside if they crack this.
Argersinger: Yeah, that's such a great point, Jeff. Advertisers are probably, in a way, kind of sick of the Facebook -- well, they're not sick of it, because they're making lots of money on it, but they'd like another platform, another place to be putting ads, and Twitter should be that.
Moser: There's no question that advertisers are looking for that. A lot of industry research does point to that. It's also worth noting the tailwind of the stock-based compensation, as that continues to come down, once revenue reaccelerates that'll really make a big difference in a short amount of time.
