If you had invested in Align Technology (NASDAQ:ALGN) at the beginning of this decade, you'd be up over 1,400%. Yes, it's been a lucrative journey for investors in the maker of Invisalign clear dental aligners.
Braces, with their wires and bright colors, have never been popular, but are often necessary for good oral health. By offering a transparent teeth-straightening option, Align Technology met consumer demand with an effective product. And the rest, as they say, is history.
But does this company still have a future? Investing is by definition a long-term exercise, and investors need to gauge where the business is headed. What can we know about where Align will be in five years?
The last five years
The bulk of Align Technology's business is from its Invisalign segment, accounting for 85% of revenue in the third quarter 2019. A key metric to track in this segment is the number of active Invisalign providers. At the end of 2015, there were 48,170 active providers. As of Q3, that number has grown to over 63,000 -- 31% growth.
Probably even more important than active providers is Invisalign volume, which is up considerably more as providers perform more treatments. Align Technology shipped 583,000 Invisalign aligners in all of 2015. The company has shipped almost double that through just nine months in 2019: 1.1 million. This robust growth has translated to strong stock price appreciation.
Over the past five years, important financial metrics have consistently tracked higher. The chart above shows that revenue growth is crucial for Align Technology, as it proportionately trickles down to net income, earnings per share, and free cash flow. It also shows that its stock price has outperformed the underlying business fundamentals.
The next five years
There are two important trends that will likely define the next five years for Align Technology. The first is international growth for Invisalign. For 2015, international clear-aligner revenue was 31% of total aligner revenue. In Q3, it was up to 44%. As international revenue grows to comprise a bigger chunk of overall revenue, the growth rate is slowing. That should be expected. In 2015, international revenue grew 44.5% year over year. In Q3, it grew "just" 31%.
To be clear, 31% growth is nothing to complain about. And indicators suggest that double-digit international growth will continue for the foreseeable future. For example, Align trained 3,100 new Invisalign doctors internationally in Q3 alone. That was 53% of the total doctors trained in the quarter. Furthermore, the company's growth is accelerating in the underserved China market, with growth of 30% year over year, and 15% quarter over quarter.
The second trend for Align Technology is growth in oral scanners, which offer high-resolution digital imagery that removes the need for old-style impressions. The company has such a product, called iTero, and its sales currently account for 15% of revenue. That's not much in terms of revenue, but the benefits of iTero for Align go beyond the hardware sales. The scanners, while useful for many dental procedures, also integrate naturally with Invisalign, improving aligner fit and patient conversion. And since these machines take years to pay for themselves, purchasing an iTero causes dentists to continue driving Invisalign sales long term.
After a year, a dentist with an iTero scanner averages six more Invisalign treatments than a dentist without one. This means international growth for iTero scanners will be particularly important. Internationally, doctors averaged only 5.5 Invisalign cases each in Q3; in North America, doctors averaged 19.1.
Not only does Align Technology have an opportunity to grow internationally by training new doctors to perform Invisalign procedures, but it can also leverage its existing doctor network by increasing its utilization rate through iTero scanners.
Where Align's headed
For the next five years, will Align Technology continue to be the growth stock it has been over the last five years? Predicting a stock's price is inherently tricky, but I do believe the business will remain strong. I see lots of opportunity for revenue growth over the next five years, as we've shown. This past quarter, revenue was up 20% year over year, and every indication is that double-digit revenue growth can continue for now.
Some feel that Align Technology is trading at a premium. But if you're looking for a strong business for your portfolio, this is a good candidate.