Align Technology Inc. (ALGN, Financial) sells a transparent teeth alignment therapy system called Invisalign, which has been embraced with open arms by the marketplace. Granted, the "technology" hasn't put any dentists out of business and there is now up and coming competition from Smile Direct Club. The company also sells scanners and services its key product, the iTero Scanner, an intra-oral scanner that can be used with Invisalign. The iTero platform also can be used with software for restorative or orthodontic procedures.Â
The company generates the majority of its revenue in the U.S.
This is an example of why big money managers take flyers on stocks. Impressive growth of 603% has this stock taking up major positions in Jim Simons (Trades, Portfolio) (1.08%) and Frank Sands (Trades, Portfolio)' (3.0%) holdings.
For the current year, the analyst consensus estimate for earnings is pegged around $4.90, next year its $6.47, reflecting a potential increase of 32% on a year-over-year basis. Revenues are expected to do the same, rising to north of $2 billion. Like so many stocks in this market, however, investors are willing to blindly pay outrageous multiples with the hope the underlying companies will continue growing at unsustainable rates.
The business itself is solid. Align Technology has done a great job in the financial performance category. Over the last decade, its revenue has grown more than 500%, net profit is up 268% and the book value has increased 368%. The company's margins and returns on capital are also strong.
The problem is Align's market capitalization is $31 billion, pricing it at 13 times sales and 60 times forward earnings. Eventually those earnings are going to flatten out and even decline as the company starts to diversify into other areas. Investors should be afraid of Smile Direct Club being bought by a big company like Boston Scientific (BSX, Financial) or Medtronic (MDT, Financial), especially as the management teams at those heavyweights have surely witnessed the explosive rise in Align's stock price.
The question now is, how long will the hype and sizzle continue?
The vast majority of Align Technology’s total net revenues come from its Invisalign Technology System, which continues to gain market share. Any decline in demand will bring the stock crashing down, and those declines are coming.
Disclosure: I am not long or short ALGN.Â
