Is Align Technology a Buy?

The maker of clear dental aligners faces big challenges, but it has big opportunities, too.

Keith Speights
Keith Speights
Jun 22, 2019 at 7:29AM
Health Care

You can safely put Align Technology (NASDAQ:ALGN) in the category of winning stocks. It's up around 2,760% over the last 10 years and was the best-performing stock in the S&P 500 in 2017. Even though 2018 was a down year, it still beat the S&P 500. And so far in 2019, the stock is up 35%.

I doubt that investors have gotten tired of all the winning. But there are different dynamics at play for Align Technology than there have been in previous years. Is the stock still a smart buy for long-term investors? 

Dentist showing tablet computer to her patient

Image source: Getty Images.

Big challenges 

Align arguably faces the biggest challenges now since its early days. The company continues to generate strong growth, but it's slowing compared with the past few years.

One key factor is that several patents on its Invisalign clear aligners have expired, with more patents expiring over the next few years. This has opened the door for competitors in the clear-aligner market.

Some of those competitors already have strong relationships with dental professionals, including Danaher (NYSE:DHR), Dentsply Sirona (NASDAQ:XRAY), and Henry Schein (NASDAQ:HSIC). In some cases, they offer more attractive pricing than Align does with Invisalign. 

There is also some potentially disruptive competition. Privately held SmileDirectClub (SDC), for example, is pioneering what the company calls "the doctor-directed at-home invisible aligner industry." Instead of going to the offices of dentists or orthodontists for clear aligners, patients use a kit at home to make dental impressions. All interaction with dental professionals is done remotely.

Align Technology hasn't seemed too worried about the potential threat from SDC, which it views as operating in a completely different segment. There is some overlap between the two companies' markets already, though. And SDC is growing rapidly, making a more-direct battle with Align a real possibility down the road. 

Big opportunities, too

The emergence of new competitors underscores just how big the opportunities are in clear aligners. Align remains the clear leader in this market (no pun intended), but with only a 16% share of the orthodontic cases for which Invisalign can be used. In the teen market, its share is only 6.7%.

Still, at the end of 2017, Align's total market share was even lower: 10%, with a 4% share in the teen market. So the company knows the secret to increasing market share -- promote directly to consumers. Its direct-to-consumer efforts include advertising on TV, digital outlets, and social media; event marketing, and offering patient concierge services. These initiatives build brand awareness and drive patients to contact their dentists and orthodontists about Invisalign.

Align Technology also has been successful at expanding the addressable market by introducing new products that can treat tougher orthodontic cases. In 2017, the company estimated that its addressable market was around 6 million orthodontic cases per year. Thanks to the launches of new versions of Invisalign, it now thinks that its addressable market is 8 million orthodontic cases per year. And the company has more room to grow through innovation, since the total orthodontic market is close to 12 million cases annually. 

The overall market is also expanding as the middle-class populations in developing nations increase. Align already has a significant presence in international markets, particularly in Europe. Roughly 40% of Invisalign shipments are to international markets. But there's still a tremendous growth opportunity in countries including China and India. 


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To buy or not to buy?

My view is that Align Technology still appears to be a great pick for long-term investors. Although the company does face increased competition, it's been able to continue generating impressive revenue growth by aggressive marketing and introducing innovative new products.

There's no question that the stock is pricey, with shares trading at nearly 41 times expected earnings. But premium valuations have been a reality for Align for years -- with the stock rising anyway. While its high earnings multiples could make it more volatile than less expensive stocks, I don't see the valuation as a reason to stay away.

I think that Align will continue to increase its market share and expand the overall addressable market. This winning stock should keep on winning for a long time.