Narrow-Moat Align Technology Reduces 2022 Guidance; Putting the Firm Under Review

Align Technology saw revenue decline and margin compression in the third quarter because of macroeconomic headwinds and lower average selling prices. We are putting the firm under review as we update our near-term assumptions. At first blush, we plan to substantially lower our fair value estimate. Third-quarter revenue fell 6.1% at constant currencies year over year. Align's profitability is under pressure from unfavorable foreign exchange and higher discounts, and management has updated its outlook for the company to perform under its 20% operating margin target for full-year 2022. Although foreign exchange is beyond the firm's control, we're more concerned with the declines in utilization and average selling price that characterized third-quarter results, which could suggest 2023 will be softer than we'd originally expected. Despite these forces buffeting Align, we don't think Align has seen its narrow moat erode. However, if pricing power is diminished for longer, we'll revisit Align's moat.