Expanding Invisalign Products And Asia Pacific Demand Will Drive Future Success

Key Takeaways

• Strong growth in Asia Pacific and other regions for Clear Aligners could drive future revenue expansion, especially in rapidly growing markets like China.
  
• Innovative products and scaling direct 3D printing operations are expected to boost sales, improve margins, and drive earnings enhancements.
  
• Challenges such as a sluggish U.S. dental market, lower Clear Aligner revenues, and restructuring could constrain Align Technology's revenue growth and operational effectiveness.

Catalysts

Designs, manufactures, and markets Invisalign clear aligners, and iTero intraoral scanners and services for orthodontists and general practitioner dentists in the United States, Switzerland, and internationally.

• Strong growth in the Asia Pacific, EMEA, and Latin American regions for Clear Aligner volumes, especially in China, could drive future revenue expansion as these regions continue to grow rapidly.
  
• The introduction and commercialization of innovative products, such as the Invisalign Palatal Expander and new iTero Scanner innovations, are likely to boost sales and potentially improve net margins with higher-margin products.
  
• The continued adoption and expansion of the Invisalign Comprehensive 3 and 3 product could provide more upfront revenue recognition and higher gross margins, which could enhance earnings.
  
• Planned scaling up of direct 3D printing operations is expected to drive cost efficiencies and margin expansion, improving net margins over time as it scales.
  
• The restructuring actions to align the business closer with the current environment are anticipated to create margin accretion for full-year 2025, positively impacting operating margins and earnings.

Align Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Align Technology's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 15.5% in 3 years time.
• Analysts expect earnings to reach $769.4 million (and earnings per share of $10.45) by about December 2027, up from $441.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.2x on those 2027 earnings, down from 38.7x today. This future PE is lower than the current PE for the US Medical Equipment industry at 36.0x.
• Analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.47%, as per the Simply Wall St company report.

Align Technology Future Earnings Per Share Growth

Risks

• The sluggish dental market in the United States, a significant contributing factor to Align's results, could lead to continued pressure on the company's revenue growth, particularly if weak consumer sentiment persists.
  
• The reduction in Clear Aligner revenues due to lower ASPs—impacted by foreign exchange, VAT rulings in the U.K., and product and geographic mix—suggests potential future challenges in maintaining revenue margin levels.
  
• Elevated interest rates and economic pressures are causing more U.S. consumers to defer orthodontic treatments, impacting patient conversion rates and, subsequently, Align's revenue and earnings.
  
• The restructuring actions, while aimed at improving efficiency and focus, involve laying off valuable employees, which could affect operational capacity and morale, potentially impacting future earnings.
  
• Competitive pressures and challenges in increasing adoption of new technology and products, such as the iTero Lumina scanner, amidst a tough economic environment, may impede Align's ability to maximize revenue and earnings growth from these innovations.

Valuation

• The analysts have a consensus price target of $264.08 for Align Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $320.0, and the most bearish reporting a price target of just $206.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.0 billion, earnings will come to $769.4 million, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 6.5%.
• Given the current share price of $228.81, the analyst's price target of $264.08 is 13.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.