In a world of selfies and social media influencers, aesthetics have never been more in focus. Not surprisingly, a survey by the American Academy of Cosmetic Dentistry found that 99.7% of adults said having a healthy smile was important for social reasons. What might surprise you, though, is that it's about more than just appearance: Gum disease from misaligned teeth can contribute to heart disease, diabetes, pneumonia, and even stroke. It turns out having a great smile is also good for your health.
Align Technology (ALGN -1.67%), a maker of invisible teeth aligners, has been capitalizing on the world's desire for great smiles for the past two decades by improving the experience -- and results -- of having tech fix your teeth. After years of excellent performance, competition and COVID-19 threaten to stall its momentum. Will Align still be able to beautify investors' portfolios, or should they brace for tough times ahead?
Two decades of growth
Founded in 1997 by a dissatisfied adult orthodontic patient at Stanford and three classmates, Align Technology set out to upend the traditional wires-and-brackets approach to straightening teeth. I still remember my painful experience with braces as a teenager. Luckily, innovation has made the experience much easier since the 1980s. Align uses enhanced scans and 3D printing to customize aligners for a better fit and faster results, plus the ability to show patients how their teeth will look when they complete treatment.
Dentists and orthodontists like Align because its technology reduces the amount of time they're required to spend with each patient by about 80%. That has left Align with an impressive base of dental professionals trained on its products, and the value proposition translates worldwide. With orthodontists making more money and patients wanting the easier experience and more desirable clear aligners, Invisalign now ships to more than 100 countries around the world.
Eight million smiles and growing
By now, the Invisalign brand is almost as synonymous with clear teeth aligners as "Kleenex" is with "tissue." In its Q2 2020 financial results, management highlighted 8.6 million customers to date, and demand continues to grow. A 2019 study by Fortune Business Insights noted that the market for clear aligners is projected to grow by more than 17% per year to $8.2 billion in 2027. Invisible aligners currently make up only 15% of the overall teeth-straightening market, with Invisalign estimated at about 10%. Although some patients do require traditional braces because of the severity of their misalignment, I expect more and more of those who are able to choose clear aligners to do so, likely translating to robust growth for Align over the next decade and beyond.
Competition and COVID take a bite out of growth
Let's take inventory of all the things going well for Align Technology. Innovative product: check. Growing addressable market: check. A product that makes people feel better about themselves: check. It's no wonder Align Technology was one of the best-performing stocks of the past decade, returning an astounding 1,432% from 2000 to 2019.
But the momentum has recently been slowed by two threats: COVID-19 and competition. Its business model relies on office visits, so Align is at a disadvantage when those offices are closed or the number of patient visits is severely limited. Although the company has expedited several virtual tools to keep patients and doctors connected, these may only serve to mitigate the damage. During Q2, Align reported a 41% year-over-year drop in revenue stemming from 52% and 46% fewer case shipments in the Americas and Europe, Middle East, and Africa (EMEA) regions, respectively.
Align's most prominent competitor, SmileDirectClub (SDC -6.55%), promotes its teledentistry model of at-home kits and retail stores as a way to increase access to clear aligner technology. This no-office-required model would seem perfect for taking market share from Align during these socially distanced times, but somewhat surprisingly, SmileDirectClub reported a 53% decline in aligner shipments in its most recent quarter after temporarily closing 90% of its retail stores.
Still investing for growth
Things did start to recover for Align toward the end of the quarter, and in the Asia-Pacific (APAC) region, where COVID-19 was no longer raging during the period, Align actually recorded a 3.4% increase in case shipments. If Europe and the Americas can learn to manage the coronavirus as Asia did, those areas may show similar results.
Management is betting that growth will return, with CEO Joe Hogan promising on the latest earnings call not to furlough or lay off any staff and touting continued investments in marketing targeted at teens and moms. This is a company looking through the dark clouds of 2020 and investing for years of growth on the other side.
As the world waits for a vaccine and routines are altered to reduce the spread of COVID-19, Align is embracing digitization and adapting its business model to support both patients and doctors. Despite being in a position to take market share, its primary competitor has performed even worse during the pandemic. With the stock's price near a two-year high, investors certainly seem convinced that growth will return soon as dentists' and orthodontists' offices reopen around the world. Given that optimism, it may be wise for interested healthcare investors to hang out in the waiting room a little longer and make sure sales do indeed come back.