Over the past six months, Align Technology has been a great trade, beating the S&P 500 by 5.5%. Its stock price has climbed to $177.15, representing a healthy 12.2% increase. This was partly thanks to its solid quarterly results, and the performance 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? Get the full breakdown from our expert analysts, it’s free.
Why Is Align Technology Not Exciting?
We’re happy investors have made money, but we don’t have much confidence in Align Technology. Here are three reasons why ALGN doesn’t excite us, plus one stock we’d rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. Align Technology’s recent performance shows its demand has slowed as its annualized revenue growth of 2.3% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Analyzing the trend in its profitability, Align Technology’s adjusted operating margin decreased by 3.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 23.2%.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Align Technology’s ROIC has decreased significantly 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 doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 15.4× forward P/E (or $177.15 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Align Technology
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