If you're looking to invest $5,000 in a company that works hard to make people smile, Align Technology (ALGN 3.68%) might be right up your alley. With its popular tooth straighteners and global reach, its growth potential is massive and enduring.
Nonetheless, spiraling world crises are making it tangibly harder for Align to prosper, and its shares are performing abysmally for the moment, falling by nearly 60% this year so far. But, the market's pessimism about its stock is an opportunity for wise and long-term investors who understand that conditions will eventually improve -- let's explore why it might be worth buying in the interim.
The struggles are real, but they won't last forever
Align makes the Invisalign series of transparent tooth straighteners, which are broadly comparable to braces in terms of their intended purpose. Since many people around the world want straight teeth, it has an extensive international sales organization, including in massive and underpenetrated markets like China. And thanks to its ongoing work to penetrate its international and domestic markets over the last 10 years with direct-to-consumer outreach, its trailing-12-month revenue climbed by an impressive 638.1%, hitting more than $4 billion.
Despite this growth, Align faces three serious headwinds. First, in the current inflationary environment, growth stocks are out of favor, as investors are likely assuming that rising interest rates in response to inflation will make it more costly to borrow funds to finance expansion. Second, consumers are also experiencing rising costs from inflation, which management thinks could be contributing to fewer people opting to start treatment with the straighteners. In more concrete terms, this headwind is probably responsible for the fact that quarter over quarter, the business's total revenue contracted by 5.6% in the first quarter. Finally, pandemic control policies in China and elsewhere are continuing to detrimentally impact its operating conditions, per company leaders.
It's true that this combination of headwinds will stick around for at least a few more quarters. But, they haven't stopped Align from continuing to grow; despite the quarter-over-quarter losses, its Q1 sales rose by 8.8% year over year, totaling $973.2 million. Though it's unclear whether the company will meet its long-term revenue growth target of 20% to 30% per year in 2022, management is still optimistic that hitting that goal will be fully possible once coronavirus-induced disruption settles down a bit more. And while its profit margin has faced pressure over the last year, it's still firmly positive at 13.8%.
This is a solid long-term pick that's going for cheap
So, rumors of Align's demise are very much exaggerated, and it's probable that most of the issues holding it back will dissipate in the medium term. And, compared to its valuation during the wild run-up of its stock starting in mid-2020 and through 2021, when its price-to-earnings (P/E) multiple peaked around 107, its current P/E of 28.7 looks especially appealing. That's even more true when you consider that nothing is different about its business model or the competitive landscape in which it operates.
In other words, its likely market and economic forces drove its stock down rather than a genuine threat to its ability to gain and hold market share profitably. Though there's no guarantee that its share price will return to its high-water mark in late 2021 anytime soon, it has the potential to grow that much and beyond by simply continuing to execute its business model consistently over time, just like it was doing for years before the pandemic. That's precisely the kind of company that legendary investors like Warren Buffett look for, and it's likely only a matter of time until the market's distaste for growth stocks ends and Align is back in favor.
