The stock of Align Technology (NAS:ALGN, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $528.34 per share and the market cap of $41.8 billion, Align Technology stock is believed to be significantly overvalued. GF Value for Align Technology is shown in the chart below.
Because Align Technology is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 20.1% over the past three years and is estimated to grow 20.33% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Align Technology has a cash-to-debt ratio of 11.15, which is better than 71% of the companies in the industry of Medical Devices & Instruments. The overall financial strength of Align Technology is 7 out of 10, which indicates that the financial strength of Align Technology is fair. This is the debt and cash of Align Technology over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Align Technology has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $2.5 billion and earnings of $22.45 a share. Its operating margin of 15.66% better than 77% of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks Align Technology's profitability as strong. This is the revenue and net income of Align Technology over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Align Technology is 20.1%, which ranks better than 81% of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth rate is 8.3%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Align Technology's return on invested capital is 59.02, and its cost of capital is 11.73. The historical ROIC vs WACC comparison of Align Technology is shown below:
To conclude, Align Technology (NAS:ALGN, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Medical Devices & Instruments. To learn more about Align Technology stock, you can check out its 30-year Financials here.
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