Company Reports

Align Technology is the leading manufacturer of clear aligners. Since it was granted US Food and Drug Administration approval in 1998, the Invisalign brand has dominated the market, providing a diverse set of solutions to patients across the world. The company operates in two segments: clear aligner and systems and services.

Narrow-moat Align Technology reported first-quarter results that were slightly higher than our expectations. Total sales were up 5.8% year over year thanks to strong systems and services performance as well as solid clear aligner volume. Management raised its full-year revenue growth outlook to 6%-8% from the midsingle digits. We think the updated guidance bakes in higher-than-expected services and new systems performance and slightly raised expectations for the clear aligner business. After adjusting our full-year expectations and accounting for time value of money, we've raised our fair value estimate to $320 per share from $316.

Narrow-moat Align reported fourth-quarter earnings that were better than our expectations. Total sales were up 6.1% year over year and were helped by solid performance from clear aligners. After rolling our model and updating our near-term assumptions, we maintain our fair value estimate of $316 per share despite the better-than-expected results.

Align Technology is the leading manufacturer of clear aligners. Since it was granted U.S. Food and Drug Administration approval in 1998, the Invisalign brand has dominated the market, providing a diverse set of solutions to patients across the world. The company operates in two segments: clear aligner and systems and services.

Narrow-moat Align Technology reported disappointing third-quarter results and, after adjusting our model, we've lowered our fair value estimate to $316 per share, down from $338. Total sales were up 7.8% year over year, but difficult macroeconomic conditions and weaker consumer sentiment weighed down top and bottom line, both of which missed consensus. Dynamic conditions driven by lower demand, especially from adult patients, loomed over the firm during the quarter and we expect this concern to continue throughout the year. Management, citing reports of deceleration for orthodontic treatment for September, trimmed full-year sales guidance roughly 4% and expects lower operating margin compared with last year.

Align Technology is the leading manufacturer of clear aligners. Since it was granted U.S. Food and Drug Administration approval in 1998, the Invisalign brand has dominated the market, providing a diverse set of solutions to patients across the world. The company operates in two segments: clear aligner and systems and services.

Narrow-moat Align Technology reported second-quarter earnings that were better than our expectations. Total sales were up 3.2% year over year, driven by strong clear aligner pricing and volume as well as improved utilization rates among dental professionals. While we remain cautious to call a full return to prepandemic normalcy in the clear aligner market, we continue to see reviving conditions, especially in China, and expect less year-over-year volatility. With this improving environment, management raised full-year guidance for top-line and operating margin. We are raising our fair value estimate to $338 per share from $311 after baking in near-term upticks in our forecast and the time value of money.

Align Technology reported first-quarter earnings that were similar to our expectations. Total sales were $943.1 million during the quarter, down 3.1% year over year, driven by soft volume and unfavorable foreign exchange. We did not make any material changes to our forecast and maintain our fair value estimate of $311 per share.

Narrow-moat Align Technology reported fourth-quarter earnings that were on track with our assumptions. We maintain our fair value estimate of $311 per share, with slight near-term downturn effects offset by time value of money.

After reviewing our key valuation assumptions, we have lowered our fair value estimate for Align to $311 per share from $331, due to our slightly lower long-term revenue growth projection. Despite our updated valuation, we have maintained Align’s narrow moat and stable trend rating. We assign Align Technology a narrow moat because we believe the company’s strong brand recognition and technically advanced products (intangibles) lead to market dominance and pricing premium, and doctors unwillingness to move to a different product (switching costs) should continue to support economic profits for at least the next 10 years.

Align Technology is the leading manufacturer of clear aligners. Since it was granted FDA approval in 1998, the Invisalign brand has dominated the clear aligner market, providing a diverse set of solutions to patients across the world. The company operates in two segments: Clear Aligner and Systems and Services.

In the 25 years since Align Technology was granted U.S. Food and Drug Administration approval for its clear dental aligners, the Invisalign brand has become synonymous with effective and discreet orthodontic treatment. The serviced addressable market comprises 15 million new orthodontic case starts each year, three fourths of which represent the teen market and the remainder adults. We estimate that Invisalign has achieved low-teens market penetration, largely due to its success at appealing to the adult market. Through two decades of research and development and an unrivaled database from roughly 10 million treated patients, Invisalign estimates that the system can treat over 90% of malocclusion cases (misaligned teeth), a substantially wider array of patients than seen with most other clear aligner firms.

We've lowered our fair value estimate for Align Technology to $331 per share, down from $461, as we've pared back our assumptions including significantly lower growth in 2022 and 2023 due to shifting consumer behavior as inflation, potential recession, and anemic stock market performance dampen demand for discretionary dental spending. Similar to LASIK vision correction and aesthetic surgical procedures, which tend to be sensitive to stock market conditions, we anticipate clear aligners are also likely to come under pressure through the near term. Further, as the premium product in this market, Invisalign could see potential customers switch to lower-priced competitors. Despite near-term turbulence, we remain comfortable with Align's narrow economic moat, which primarily stems from switching costs associated with its iTero scanners.

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.

Align Technology saw slowing growth in its latest quarter that generally adheres to the broad outlines of what we’ve been expecting in 2022—moderation from the pandemic-fueled record-breaking growth seen last year. The slight adjustments we’ve made to our full-year projections weren’t material enough to shift our fair value estimate. Second-quarter revenue fell 4% year over year, though we recognize the excessively strong performance from the prior-year period makes for a very challenging comparison. More important, quarterly revenue declined just shy of flat on a sequential basis. If we see a similar dynamic in the third quarter, we’d likely revisit our assumptions for the second half of 2022 and next year. Fortunately, profitability has remained resilient and consistent with our projections. We saw little in the quarter to change our thinking on Align’s switching costs that support its narrow economic moat. If anything, continued strength in the placement of its iTero scanners bodes well for adoption of Invisalign over the long haul.

In the 25 years since Align was granted U.S. Food and Drug Administration approval for its clear dental aligners, the Invisalign brand has become synonymous with effective and discreet orthodontic treatment. The serviced addressable market comprises 15 million new orthodontic case starts each year, three fourths of which represent the teen market and the remainder adults. We estimate that Invisalign has achieved low-teens market penetration, largely due to its success at appealing to the adult market. Through two decades of research and development and an unrivaled database from roughly 10 million treated patients, Invisalign estimates that the system can treat over 90% of malocclusion cases (misaligned teeth), a substantially wider array of patients than seen with most other clear aligner firms.

We're placing Align Technology under review as we take a closer look at the evolving competitive set, as well as the implications of higher inflation on discretionary dental spending.

In the nearly 25 years since Align was granted U.S. Food and Drug Administration approval for its clear dental aligners, the Invisalign brand has become synonymous with effective and discreet orthodontic treatment. The serviced addressable market comprises 15 million new orthodontic case starts each year, three fourths of which represent the teen market and the remainder adults. We estimate that Invisalign has achieved low-teens market penetration, largely due to its success at appealing to the adult market. Through two decades of research and development and an unrivaled database from nearly 10 million treated patients, Invisalign is at the forefront of technological innovation in orthodontics, and the company estimates that the system can treat over 90% of malocclusion cases (misaligned teeth).

Following Align Technology’s lackluster first-quarter results, we are lowering our fair value estimate to $512 per share from $606 after incorporating our expectations for higher operational expenses to reach management’s 20%-30% revenue growth targets over the longer term. Nonetheless, we think the market reaction that drove Align shares down 20% after the release was overblown. We remain confident in the firm’s narrow moat, which rests on switching costs that haven’t changed appreciably, in our view. Furthermore, with consumers growing more cautious about spending discretionary income in the current macroeconomic environment, a dip in case volume is not indicative of a weakening competitive position. The shares are attractively undervalued, from our perspective.

In the nearly 25 years since Align was granted U.S. Food and Drug Administration approval for its clear dental aligners, the Invisalign brand has become synonymous with effective and discreet orthodontic treatment. The serviced addressable market comprises 15 million new orthodontic case starts each year, three fourths of which represent the teen market and the remainder adults. We estimate that Invisalign has achieved low-teens market penetration, largely due to its success at appealing to the adult market. Through two decades of research and development and an unrivaled database from nearly 10 million treated patients, Invisalign is at the forefront of technological innovation in orthodontics, and the company estimates that the system can treat over 90% of malocclusion cases (misaligned teeth).