For months, the Nasdaq Composite (NASDAQINDEX:^IXIC) has dramatically outperformed other major market benchmarks. This week, investors have started to question whether the Nasdaq has come too far too quickly, and that's put pressure on the index even as the rest of the market has performed better. On Tuesday, the Nasdaq had to fight headwinds to stay above water, but as of 3:30 p.m. EDT, it and the Nasdaq-100 Index had still managed to eke out tiny advances.
Most of the big stocks in the Nasdaq had relatively modest movements on Tuesday, with investors seemingly having gone into wait-and-see mode as earnings season gets underway. But one stock managing to post sharp gains today is Align Technology (NASDAQ:ALGN). The maker of orthodontic devices has shareholders thinking that its biggest challenges are now behind it.
How Align took a hit to the mouth
Align Technology has taken a hard hit from the coronavirus pandemic. Because of fears of contagion, most dentists and orthodontists have shut their offices. That has not only delayed bringing in new clients but also kept many existing patients from moving ahead with their course of treatment. The stock responded negatively, plunging 65% at its worst levels in March.
First-quarter financials confirmed the damage to Align's business. Revenue growth evaporated, with sales breaking even compared to year-earlier levels. Sales of the company's well-known Invisalign clear aligners rose just 3%, while the iTero digital dental impression platform's revenue was down by double-digit percentages. That cut Align's overall profits almost in half year over year.
The second quarter could be equally poor. Throughout much of the U.S., office closures didn't really start up until March, giving Align two months' worth of ordinary performance during the first quarter. Much of the April-to-June period, however, saw those offices closed. That could make the financial pain for Align even more severe when it reports those results later this month.
The road back for Align
Even with the prospect of seeing another bad quarterly report, investors seem more optimistic about Align's longer-term prospects. Even though troubling increases in COVID-19 case counts are making some states rethink their reopening plans, more orthodontists and dentists are beginning to open their doors to patients again.
The big question remains how quickly Align can get back into growth mode. Even based on 2019 results, Align's stock trades at more than 50 times trailing earnings. Although Align has withdrawn its guidance for 2020, most of those following the company expect declines of 40% to 45% on the bottom line. That will make valuations jump significantly.
Bulls hope, however, that the only impact from the COVID-19 pandemic on Align will be a delay in sales that the orthodontic aligner maker would have gotten anyway. As long as pent-up demand actually comes back when dental and orthodontic professionals are available again, the bounce in Align's stock price makes sense.
Look for recovery candidates
Align is just one example of a company that has promising prospects but has to get through a period of uncertainty. But the longer the pandemic lasts, the more difficult it will be for growth stocks like Align that have returned to their pre-coronavirus levels to justify their moves higher.