After a sour 2022, the stock market has been sweet so far this year for shareholders of beaten down stocks. There is perhaps no better example than Align Technology (ALGN 0.40%). The stock is up nearly two-thirds in value in 2023 alone after falling 67% last year. It rocketed higher after an earnings report last week that left Wall Street thinking growth is getting back on track after it boomed -- and then collapsed -- through the pandemic. But digging a little deeper should give investors pause.
A turning point
Align provides a suite of integrated offerings -- hardware, software, and services -- that cover the end-to-end journey of straightening misaligned teeth. But the engine is demand for its clear aligners. They're an aesthetically pleasing alternative to the old bracket and wire braces many of us grew up with. The aligners made up 82% of revenue last year. Management measures shipments of those aligners in cases. And cases shipped were down 7.5% for the quarter and 7.4% for the entire year. It sounds bad. But the quarter did represent an inflection point. Sequential growth (the most recent quarter compared to the previous one), finally turned positive.
Data source: Align Technology. Chart by Author. QoQ=Quarter-over-Quarter.
To Wall Street, that uptick was the light at the end of the tunnel. Growth was back. It isn't waiting to see daylight. Shares jumped 27% after the company reported. The biggest risk is still out there: a possible economic train coming down the tracks.
The road ahead
Although case shipments have started to tick up again. The opposite is true for the number of doctors who are getting shipments. The number grew just over 1% in 2022. And the sequential growth was actually negative for the fourth time in the last five quarters. This paints a picture of a market -- as it stands now -- that is somewhat saturated. That could change.
Data source: Align Technology. Chart by Author. YoY=Year-over-Year.
On the conference call that followed the earnings release, CEO Joe Hogan summed up the issue in one word: China. Continued lockdowns due to COVID limited the number of doctors Align could ship to. Management was cautiously optimistic about recent developments in the country but called the uncertainty "incredible" and the country "a blur for us and very difficult." That makes any prediction for a rebound sound premature.
Many possible outcomes
In one scenario, China reopens, international markets continue returning to normal, and the American consumer keeps spending as the economy avoids recession. In that case, the stock could easily trade back to the price-to-sales (P/S) ratio it averaged before the pandemic. That would put shares over $500, well above today's price of $350.
On the other hand, China's reopening may not translate into robust spending, continuing conflict in Europe could stymie growth, and the U.S. economy could finally roll over after all of the excess savings from the last few years are exhausted. In that scenario, the more conservative recent P/S ratio could be warranted. That would price the shares around $220 -- 35% below where they stand now.
Today's price is probably fair since it is almost exactly between a positive and negative outcome for the coming year. Just don't expect it to stay there. As new information comes in, Wall Street will act fast. And the share price will follow.
