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 $582.35 per share and the market cap of $46.1 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 22.87% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Align Technology has a cash-to-debt ratio of 13.26, which ranks better than 69% of the companies in the industry of Medical Devices & Instruments. Based on this, GuruFocus ranks Align Technology's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Align Technology over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Align Technology has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.8 billion and earnings of $5.75 a share. Its operating margin is 19.27%, which ranks better than 80% of the companies in the industry of Medical Devices & Instruments. Overall, the profitability of Align Technology is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Align Technology over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Align Technology is 20.1%, which ranks better than 79% of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth is 8.3%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Align Technology's return on invested capital is 11.92, and its cost of capital is 11.20. The historical ROIC vs WACC comparison of Align Technology is shown below:
In closing, the stock of Align Technology (NAS:ALGN, 30-year Financials) 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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