Over the last six months, Align Technology’s shares have sunk to $170.94, producing a disappointing 14.2% loss - a stark contrast to the S&P 500’s 11.3% gain. This might have investors contemplating their next move.
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?
Even though the stock has become cheaper, we don't have much confidence in Align Technology. Here are three reasons we avoid 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 647,750 in the latest quarter, and over the last two years, averaged 3.5% 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
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Align Technology’s margin dropped by 9.4 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 15.5%.
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 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 bar. Following the recent decline, the stock trades at 15.8× forward P/E (or $170.94 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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