What happened
Shares of Align Technology, Inc. (ALGN 2.63%) are plunging today, down 23.2% as of 11:02 a.m. EDT, after the orthodontic-device company reported its third-quarter earnings. Lower average selling prices (ASPs) for Align's Invisalign clear aligners caused the company's revenue growth to slow and even decline from Q2 of 2018.
So what
Align has been a company that seemingly could do no wrong. Quarter after quarter, it set new all-time-high levels for revenue and earnings. As a result, the stock's valuation reached a point where Align couldn't have anything go wrong without a major pullback.
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In many respects, Align's third quarter looked great. Revenue jumped more than 31% year over year. Earnings increased nearly 23% over the prior-year period. Invisalign shipments were at record highs. The fly in the ointment was Invisalign's average selling price, which dropped from $1,315 in Q2 to $1,230 in Q3.
Align's management said that there were three main reasons behind the lower Invisalign ASP. The company ran promotional programs during the third quarter that included discounts for its clear aligners. It experienced a negative impact from foreign exchange. Additionally, product mix changes also contributed to the ASP decline.
The promotional programs won't carry over into the fourth quarter. CEO Joe Hogan said in the company's Q3 conference call that the programs didn't click with the lower-end segment of the customer base like expected. He stated that Align "learned from it and we move on."
Now what
Align's growth trajectory could be slowing somewhat, but the company definitely continues to enjoy very robust growth. The issues experienced in the third quarter appear to be largely temporary ones. There could be reason for concern if Align was slashing prices for Invisalign because of fears about competition, but that isn't the case.
The main thing to watch now with Align is how it executes on its strategy. The company has significant growth opportunities both in the U.S. and in international markets. Align also should be able to expand the total addressable market by launching new products, including an Invisalign rapid palate expander product.
High-flying stocks that are priced for perfection -- like Align has been -- respond badly to any hint of imperfection. Over the long run, though, what really matters are the business prospects for the company and not the stock fluctuations. Those prospects appear to remain quite strong.
