After spending most of the year riding high, Align Technology (NASDAQ:ALGN) came crashing down to end 2018. The orthodontic device company saw its stock soar as much as 75% before releasing a disappointing third-quarter report that let the wind out of its sails, leaving shares down for the year.

Align is scheduled to report its fourth-quarter financial results after the market close on Tuesday, Jan. 29. Let's take a look at the company's most recent quarter and what led to the late-year plummet to find insight into what investors can expect from the company's upcoming earnings release.

A woman applying see-through aligners to her teeth.

Image source: Getty Images.

Impressive at first glance...

Align has been producing impressive growth lately, and that was largely still intact.  The company generated record revenue of $505.3 million for the third quarter, an increase of 31% year over year, which topped the high end of management's forecast. Diluted earnings per share of $1.24 exceeded expectations, growing nearly 23% compared to the same quarter last year.

Strong sales of Invisalign clear aligners were evident, as case shipments grew by 35% year over year, and up 5.5% sequentially, to 319,345. Revenue from the segment increased 25% year over year to $427 million, while sales of scanners and services hit $78 million, a 79% increase.

What seemed like a stellar quarter actually had trouble just below the surface.

...but left investors down in the mouth

The biggest challenge Align faced during the quarter was the sequential decline of its clear-aligner sales, which fell by 1.4% compared to the second quarter. This was primarily the result of average selling prices (ASPs) that fell in both domestic and international markets. The lower ASPs were driven by promotional discounts, a change in the product mix, and foreign exchange headwinds. 

During the conference call, management was quick to point out that the promotions were not the result of any significant competition in the marketplace, but were an effort to engage with teens, since summer months are opportune times for younger customers who want straighter teeth. Additionally, the company has no control over fluctuating exchange rates, so investors shouldn't read too much into that factor.

What the future holds

For the upcoming fourth quarter, Align anticipates revenue in a range of $505 million to $515 million, an increase of between 20% and 22% year over year. The company is forecasting case shipments between 330,000 and 335,000, which would represent an increase of between 29% and 31% compared to the same quarter last year. Align projects its operating margin will fall between 23.2% and 23.9%, resulting in diluted earnings per share of $1.10 to $1.15.

While we aren't beholden to Wall Street's short-term earnings-driven mindset, following along can provide perspective on the market's overall feeling for a company. Analyst estimates call for revenue of $513.39 million, an increase of 21.9% year over year, and earnings per share of $1.16, a 2.5% decline. It's telling that both numbers are near or above the high end of management's forecast, showing investors have high hopes for the quarter.

The recent fall from grace has had a positive effect on Align's overheated valuation. After spending much of last year with a price-to-earnings ratio between 80 and 115, Align is selling for a much more modest trailing-12-month earnings of 56. The stock hasn't been this cheap in nearly 18 months.

With a long runway for its aligners and a growing market for its scanners, Align still has a massive opportunity ahead. Investors should be watching for a continuation of its strong growth when the company reports earnings on Tuesday, Jan. 29.

Check out the latest Align Technology earnings call transcript.