Hey everyone, sorry I haven’t posted in awhile, busy with school. Graduating in April.
Anyway, I’ve been looking into Align Technology. I know this board is familiar but just wanted look into it a bit more. The stock price has run up a ton (60%+) in the past couple months but the business performance, quite honestly, has warranted it.
The awesome thing is the acceleration of the top-line. It always interests me greatly when seeing that.
Here are the past 4 quarters of YoY growth:
Q317 - 38%
Q217- 32%
Q117- 30%
Q416- 27%
For those who don’t know, the company makes the Invisalign trays, the clear retainer-like braces. Management sees a large TAM and they are aggressively expanding internationally. In the last earnings call, the CEO foresees ALGN to be able to control 60-70% of all orthodontic cases. Right now, that market share is 8%.
The market cap is about 20 billion, a little bit bigger than I usually look for. However, we could still be in the early innings of the future of teeth straightening (not the sexiest industry), alas, a profitable one. Gross margin for the trays is 77% and net operating margin is 24%, a number which management admits could be higher but the opportunity for re-investment is too good.
The company is innovative as well. Here are a couple examples. They have a relationship with SmileDirectClub, a company that allows an option for “do-it-yourself” teeth straightening. Cheaper for sure. Plus, ALGN started a virtual Concierge service that tells people their appointment times and answers any questions. Another thing is that ALGN has started working to finance customers who are turned away because the high down payment. ALGN will be working with a third party lender so as not to take on any bad debts expense but just another way they are serving customers.
Now we get to the fun part, valuation. By just looking at the PE, investors may be turned away, but contextualized I think could be interesting. Based on the recent run up, it is easy to shun the company and say it’s too late but maybe it’s not. That was the reason I have not officially bought in, but I have forced myself to look deeper and I have liked what I’ve seen.
So by yahoo finance estimates, the TTM PE for ALGN is 77. Geez, for orthodontics? Well, let’s break it down.
ALGN’s top-line has been accelerating for the past four quarters and the margins show a competitive advantage. Just for fun, let’s inappropriately compare it to a company like TTD just to see if the numbers are feasible. ALGN’s revenues have been accelerating while TTD’s have been slowing (TTD revenue estimates for next quarter are in line with ALGN’s).
TTD’s TTM PE is about 49, but ALGN has a much higher net margin currently and seems to have a bigger moat (easier to make software than replicate ALGN’s patented trays). TTD’s technology is inherently more scalable being it is software but both companies have to focus on relationships. ALGN with orthodontists so they will implement Invisalign and TTD with ad agencies. So the scalability might not be completely different, though ALGN, of course, is much more capital intensive. Plus, both companies have seemingly big addressable markets. In context with the financials of a company like TTD, ALGN’s valuation becomes much more digestible.
Anyway, here are some thoughts. I may start a position this upcoming week, but will have to do a little more research.
XMFish