After a meteoric increase in valuation during the first 11 months of 2017 made it one of the S&P 500's best-performing stocks, Align Technology's (NASDAQ:ALGN) shares slipped 14.8% in December, according to S&P Global Market Intelligence.
Align Technology's Invisalign clear aligners continue to win market share globally as an alternative to traditional metal braces, and over the course of 2017, growing demand in Asia and among teenagers led to a more than doubling in its market cap last year.
In December, it appears two things may have weighed down investor optimism and led to shares selling off. First, the rapid run-up in Align Technology's shares last year lifted its forward price-to-earnings ratio to more than 70 at the end of November. That's an undeniably rich valuation, despite the company's 60% year-over-year EPS growth in Q3 2017.
Second, management filed a patent infringement suit against 3Shape in December that accuses 3Shape of importing dental scanners to the U.S. that violate Align Technology patents. Scanners are used by dentists and orthodontists to map patient mouths in order to determine treatment options, and news of the infringement may have led investors to question how the competitive landscape might evolve over time.
Investors can't be blamed for wanting to book some gains following Align Technology's market-trouncing performance, but a long-term view of the company might be best. Despite dominating the market for clear aligners, metal braces are still much more widely used, and as a result, management estimates it only has about 8% market share globally.
The company's decision to file a patent complaint is a reminder that it faces competition, but it's also good to see management aggressively defending its intellectual property. Align Technology's Itero scanner accounts for a relatively small slice of the company's total revenue, but its sales are growing, and if a successful patent fight leads to more installations, it could provide tailwinds.
The big question for investors now is whether shares are on sale. A forward P/E ratio that remains over 50% suggests that Align Technology still isn't a cheap stock, but with sales growing by nearly 40% year over year, earnings growing even more quickly, and single-digit market share, this could be a good chance to tuck some shares into long-term portfolios.