Since the COVID-19 pandemic began, Align Technology (NASDAQ:ALGN) has fallen on hard times. The vast majority of dental clinics and orthodontics practices have had to shut down as a result of lockdown measures to contain the coronavirus, causing demand for Align's products to plummet.
Indeed, in the span of one month, Align's share price declined by nearly 50%. Will the company be able to demonstrate that its recovery is more than a short-term rebound now that more states are reopening for business? Let's find out.
A massive impact on its core business
Align makes aligners (under the Invisalign brand) and dental scanners (iTero), and offers computer-aided design services for the dental and orthodontic industry. Before the pandemic, demand for the company's products was growing steadily. Last year, it had a record $2.4 billion in revenue, a 22.4% increase from 2018.
In the most recent quarter, however, the growth momentum stalled. For Q1 2020, Align recorded $551 million in revenue, unchanged from the previous year.
In Q1 2019, the Invisalign and iTero segments had grown by 22% and 55% year over year (respectively), but this year, Invisalign revenue was up by just 3% while demand for iTero declined by 13%. At the same time, Align's net profits fell by nearly half, to $0.73 per share.
The impact on its core business was severe, considering cases of COVID-19 only began to pick up in the U.S. in mid-March. Hence, investors should expect Align's revenue and EPS for Q2 2020 to be even worse than these.
The light at the end of the tunnel is that Align's business model is sound and profitable. During the quarter, 61,000 doctors used its products and services, with 4,100 being first-time customers. About 104,000 children and teens started treatment during this time, and the company managed to ship 359,400 cases of its aligners before the pandemic ramped up.
Furthermore, Align is very profitable, with a 72% gross margin, 23% operating margin, and 19% net margin. Its return on equity is also huge, at more than 34%, and the company has $791 million in cash with no debt on its balance sheet. Given all this, Align should not need to raise capital during this difficult time.
The takeaway for investors
Align is a solid growth stock that provides a much-needed, high-margin service. However, the COVID-19 pandemic has illustrated that its core business just isn't essential enough, and it may be susceptible to further material declines should second or third waves of COVID-19 occur. With a market cap of $20.8 billion, Align is trading at a little more than 10 times price-to-sales and 49 times price-to-earnings going forward.
Given that this company went from growing at over 20% year over year to having its momentum stopped in a very short period of time, its stock is arguably a little expensive. Indeed, the company's P/E based on trailing-12-month earnings is 58 (less a $1.5 billion income tax benefit in Q12020) , illustrating just how much the stock may be affected by COVID-19.
Overall, I believe the stock is a strong buy for growth investors with a long-term horizon. Investors who aren't likely to sell in the face of near-term headwinds should find themselves enriched after the COVID-19 pandemic subsides in one to two years' time.