Orthodontic Approvals And Market Realignments Will Ensure A Bright Future

Key Takeaways

• Rising operating expenses and foreign exchange challenges threaten net margins and revenue growth.
  
• Regional regulatory hurdles and market price sensitivity may delay innovation benefits and impact revenue projections.
  
• Unfavorable forex rates, market stagnation, and sluggish product adoption hinder revenue growth; tariffs and competition threaten margins and future earnings.

Catalysts

Designs, manufactures, and markets Invisalign clear aligners, Vivera retainers, and iTero intraoral scanners and services in the United States, Switzerland, and internationally.

• Increased operating expenses, particularly linked to restructuring charges and advertising, suggest rising costs that could pressure net margins in the near term.
  
• The adverse impact of foreign exchange rates on revenues and ASPs signals potential difficulties in maintaining strong revenue growth, particularly if the U.S. dollar continues to strengthen.
  
• The need for regional regulatory approvals for new products like the Invisalign Palatal Expander might delay revenue contribution from these innovations, potentially impacting overall revenue projections negatively.
  
• Uncertainties surrounding tariffs with Mexico could increase the company's costs, further impacting net margins if not mitigated effectively.
  
• Price sensitivity in markets and the removal of processing fees might not fully offset the impact of planned price increases, possibly leading to lower-than-expected revenue growth.

Align Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Align Technology compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Align Technology's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.5% today to 15.3% in 3 years time.
• The bearish analysts expect earnings to reach $660.9 million (and earnings per share of $9.16) by about April 2028, up from $421.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, down from 30.8x today. This future PE is lower than the current PE for the US Medical Equipment industry at 29.5x.
• Analysts expect the number of shares outstanding to decline by 2.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Align Technology Future Earnings Per Share Growth

Risks

• The company's financial results are significantly impacted by unfavorable foreign exchange rates, affecting both revenue and operating margins, especially from the strengthening of the U.S. dollar against major currencies.
  
• The orthodontic market, particularly in North America, has been flat for the last three years, posing a challenge for revenue growth as doctors revert to traditional braces to maintain margins amidst reduced patient throughputs.
  
• Despite new technology and product launches, adoption in the orthodontic channel, especially among teens, has been sluggish and is challenged by the economic dynamics in dental practices, which could impact revenue growth.
  
• The introduction of a 25% tariff on shipments from Mexico to the U.S. could increase costs significantly and negatively affect net margins if not offset by pricing strategies or operational changes.
  
• The market environment in China is noted as stable, but macroeconomic uncertainties and competitive pressures could impact future earnings.

Valuation

• The assumed bearish price target for Align Technology is $197.29, which represents one standard deviation below the consensus price target of $234.7. This valuation is based on what can be assumed as the expectations of Align Technology's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $290.0, and the most bearish reporting a price target of just $150.54.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $660.9 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of $177.23, the bearish analyst price target of $197.29 is 10.2% 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.