Shareholders of Align Technology would probably like to forget the past six months even happened. The stock dropped 21.4% and now trades at $185.24. This may have investors wondering how to approach the situation.
Is now the time to buy Align Technology, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Align Technology Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Align Technology. Here are three reasons why there are better opportunities than ALGN and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Dental Equipment & Technology company because there’s a ceiling to what customers will pay.
Align Technology’s clear aligner shipments came in at 642,305 in the latest quarter, and over the last two years, averaged 3.1% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Align Technology’s margin dropped by 7.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Align Technology’s free cash flow margin for the trailing 12 months was 18.2%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Align Technology’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Align Technology isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 18.2× forward P/E (or $185.24 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
Stocks We Like More Than Align Technology
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