The only question when it comes to Align Technology, Inc. (NASDAQ:ALGN) is its valuation. ALGN stock trades at 75x the high end of its 2017 EPS guidance — a staggering multiple. Align Technology stock has almost tripled over the last year, and it’s up 26% already in 2018.
Valuation aside, Align is a wonderful company. Its Invisalign product has revolutionized orthodontics and continues to displace traditional business. The iTero Intraoral Scanner adds another revolutionary product with substantial growth potential.
Meanwhile, Align has only scratched the surface of its potential overseas. International revenue is 36% of the year-to-date total, but it’s growing at a 43% clip.
That part of the story sounds a bit like that of Netflix, Inc. (NASDAQ:NFLX), whose international subscriber base recently surpassed the domestic total. And ALGN stock feels a bit like NFLX — a highflier with seemingly no ceiling that continues to rally even as the valuation becomes more and more stretched.
Ahead of Align’s earnings reports on Tuesday, NFLX is an interesting comparison from a sentiment standpoint. And if NFLX’s explosive post-Q4 rally is any guide, ALGN will blow past $300 next week.
Q4 Earnings
The simple play when it comes to ALGN is take at least some money off the table after the recent run. Again, Align Technology stock has risen 26% this year — in less than 30 days! The stock is rebounding from a December dip — ALGN dropped almost 15% — but it’s still setting new all-time highs seemingly with each passing session.
Admittedly, Q4 estimates look like they might be tough to reach. Revenue is expected to rise 35% year-over-year, ahead of the 34% growth rate seen YTD. Wall Street predicts EPS growth will accelerate as well, to 43%. Both are huge numbers for a company that already generated ~$1.35 billion in sales and some $270 million in net income over the past four quarters.
But fundamentally, there’s just no reason to bet against Align Technology. The company rarely misses estimates. International growth outside of the key Dutch market accelerated in Q3 and is set up well for Q4. iTero has a huge growth runway, with an agreement with major distributor Patterson Companies, Inc. (NASDAQ:PDCO) likely providing a boost in the quarter.
It’s possible that expectations have built too high. But the same could have been said heading into the Q3 report in October. Align stock has gained 40% since then.
ALGN and the Market
The NFLX parallel is an interesting one, at least in the near term. If a “story” is selling, investors are going to buy. And Align’s story is selling. The company still has huge room for growth in U.S. orthodontics and particularly overseas. iTero adds another potential driver.
Is valuation a concern? Absolutely. But valuation has been a concern at NFLX for years now. Anyone who dared short that stock got run over, and those who sold missed out on big gains. The same is true of Amazon.com, Inc. (NASDAQ:AMZN) and multiple other growth stocks. Simply put, the story has been enough.
Closer to ALGN’s model is Intuitive Surgical, Inc. (NASDAQ:ISRG). That stock, based on the disruptive Da Vinci offering, has looked expensive for years now. It’s also nearly doubled over the past year.
To be sure, ISRG did pull back after its own Q4 beat on Friday, dropping about 4%. But that company projected narrower margins next year. Align is early enough in its growth story that it won’t have that problem. In fact, I’d bet that it won’t have any major problems.
And in this market, that will be enough. $300 requires a rally of less than 10%, and while I don’t necessarily expect that to come immediately, it’s an easy target for ALGN to hit in the near term. The business is winning, and the market is behind the stock. Until that changes, the direction of ALGN stock won’t, either.
As of this writing, Vince Martin has no positions in any securities mentioned.
