What happened

Align Technology (ALGN -1.63%) saw its shares plummet 25% this week, according to data from S&P Global Market Intelligence. The stock is down more than 53% so far this year; it had a 52-week high of $737.45 and a low of $270.37. It closed at $360.57 last Friday and hit a weekly low of $304.66 on Thursday. The company makes and sells both Invisalign clear aligners, and iTero intraoral scanners and services for orthodontists and general dentists. Its two segments are "clear aligner" and "scanners and services."

A dentist works with a patient on fitting Invisalign braces.

Image source: Getty Images.

So what

The company released its first-quarter earnings report after the market closed on Wednesday; Align's numbers, while mostly up year over year, were all down compared to the fourth quarter, a worrying trend. Investors may also have been spooked when the company withdrew its guidance for the time being.

Align reported revenue of $973.2 million, down 5.6% sequentially. The company's earnings per share (EPS) of $1.70 were down from $2.40 in the fourth quarter of 2021 and $2.51 in the first quarter of last year. The company had net income of $168.7 million, which was down 29.7% sequentially and 33% year over year.

CEO Joe Hogan said there were several factors for the drop: COVID lockdowns, particularly in China; weaker consumer confidence in the United States; inflationary pressures; and the Russia/Ukraine conflict. The problem for Align is that its products are considered discretionary health spending, and that's one of the first places consumers look to cut back when they tighten their belts.

Now what

Investors will want to see if the first-quarter numbers are an aberration or the start of a trend for the healthcare stock. Align's scanners and services segment was hit particularly hard in the first quarter, with a 24.2% drop in revenue sequentially. The first quarter, however, is often a slower one for capital expenditures by dentists and orthodontists, so that segment could easily bounce back. Meanwhile, the company's larger segment, "clear aligner," was only down 7% sequentially and up 7.5% year over year.

More concerning is the drop in the company's margins the past two quarters, perhaps due to inflation. In the third quarter of 2021 the profit margin was 25.7%, but in the fourth quarter it was down to 21.4%, and in the first quarter of 2022 it was 20.4%.