Is Align Technology a Buy?

Dentist next to patient pointing to her smile

Align Technology (NASDAQ: ALGN) wowed investors in 2017, soaring more than 130% and ranking as the best-performing stock in the S&P 500 . Those wows faded this year, though. The orthodontics-device maker is on track to finish 2018 with a loss -- and potentially, its worst performance since 2008.

But is Align Technology a stock to buy now? Here are the arguments for and against this former high-flying stock.

Dentist next to patient pointing to her smile

Image source: Getty Images.

The case for Align Technology

Probably the best reason to consider buying shares of Align Technology is that the company still has only begun to tap the addressable market for its Invisalign clear aligners. There are around 8 million orthodontic cases annually for which Invisalign is applicable. Align currently claims only around 13% of this addressable market.

The company has made stronger inroads in the adult market, where Invisalign has a 35% market share. But the teen market is a lot bigger than the adult market. And Align has only captured a little over 5% of the teen market, reflecting plenty of room to grow.

There are three primary ways that Align can capture more of this addressable market. First, the company can expand internationally, where there are more prospective patients than in the U.S. Second, the company can attract more dental professionals to its network. These professionals then will have an incentive to promote Invisalign. Third, Align can market Invisalign more heavily to consumers. The good news is that Align is doing all three.

But Align Technology also has another way to grow -- by expanding the addressable market. The total number of orthodontic cases each year is around 12 million, roughly 50% larger than the 8 million cases that Invisalign can currently target. Align thinks that by introducing new innovations, Invisalign can treat a significant percentage of these more difficult cases.

So far, the discussion has been only about Invisalign. Align makes around 15% of its revenue from intraoral scanners and services. As the company increases its market share for Invisalign, its scanner sales should also grow.

The case against Align Technology

What's the best reason to stay away from Align? There's a real risk that the company won't be able to grow quickly enough to justify its premium stock valuation.

Align's shares trade at more than 50 times earnings. The stock already has tremendous growth expectations baked into its price. But future growth for Align could be harder to come by than in the past.

For one thing, several of Align's Invisalign patents have expired. This has opened the door for new rivals to enter the clear-aligner market and offer products that are less expensive than Invisalign.

Align also faces a potentially disruptive threat from a new business model where competitors ship clear aligners directly to consumers. SmileDirectClub (SDC) stands at the forefront of this model. This direct-to-consumer approach is attractive because of its convenience and lower costs.

The main reason for Align's poor stock performance in 2018 is that the company's growth has slowed. In the third quarter, for example, Align reported a quarter-over-quarter decline in Invisalign sales . Although shipment volumes were higher, average selling prices (ASPs) for Invisalign were lower.

Is the stock a buy?

Both the opportunities and the threats for Align are real. However, I think that the opportunities outweigh the threats.

While Align faces increased competition due to some of its Invisalign patents expiring, the company continues to innovate and build its intellectual property portfolio. Align also owns 19% of SDC, which allows it to profit from growth in the direct-to-consumer market.

The company's lower ASPs in Q3 stemmed, in large part, from promotional discounts that won't be offered in future quarters. Align stated publicly that these promotional discounts weren't related to competitive challenges in the marketplace.

My view is that Align Technology remains in a great position to grow significantly well into the future. I think the stock is a definite buy for long-term investors.

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Keith Speights owns shares of Align Technology. The Motley Fool owns shares of and recommends Align Technology. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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