Align Technology, Inc. (NASDAQ:ALGN) would have been the perfect acquisition for a company like Allergan plc (NYSE:AGN). The Botox maker could have benefited from having the Invisalign product lineup in its portfolio. Alas, it didn’t make a deal and investors have seen ALGN stock go from a market cap of $7.5 billion in January 2017 to $23 billion now.
With Friday’s 3.2% boost, Align stock is now up 29% on the year, compared to the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) rally of “just” 8.8%. It also allowed ALGN stock to make new all-time highs. Let’s look at the chart.
Trading Align Stock
After jumping over $220 in late-October, Align quickly climbed to $265. From there, it chopped between $220 and $275 for about six months. On Friday though, it finally broke out over that level. The question is, can the breakout hold this time?
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We saw a similar move in January, which ultimately failed as Align stock cratered back down to $220. The current breakout has a few things working to its advantage though.
The first is where the rally started before it went on to break through resistance. During its false breakout in January, Align Technology stock began its rally from $220. This time though, it began around $250. Further, its MACD reading, which measures momentum, is breaking out of its downtrend and could help add fuel to the fire.
What do bears and bulls want to see from here? Bulls want ALGN to find support above $280. If that comes from consolidation right now or a further rally and pullback, it doesn’t matter. So long as this level is support, $300 and above shouldn’t be far off.
For bears, they want to see $280 fail as support. Should it do so, there’s no clear level of support between $275 and $260, giving short-sellers a little room to breathe.
A Further Catalyst to the Breakout
The technicals are a big part of any stock’s breakout performance, but that’s only the fuel. Often times, the fuse is based on fundamentals. That’s why it’s so important to use both when looking for prospective stocks to buy or sell.
In the case of Align stock, business is going great. In late-April the company beat on earnings per share and revenue expectations. Sales grew more than 40% and operating cash flow jumped more than 60%, while gross and operating margins expanded.
Analysts are looking for full-year sales growth of 32%, followed by 22% growth in 2019. On the earnings front, analysts expect earnings to grow 21% this year and 25% next year.
As people want to look better and feel more confident (who doesn’t?), ALGN is a natural product to fill those needs. It’s also not a short-term trend and it’s no secret that people have wanted straight teeth for a long time. It helps that the economy is doing well. As a result of this secular, long-term trend, investors have aggressively bid up the stock.
It’s Not All Perfect
Despite the seemingly great situation with Align stock, not everything is perfect. When business is going great and shares are hitting new highs, the stock doesn’t tend to come with a low valuation. That’s true for companies like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN), and it’s true for Align too.
While analysts expect really solid growth over the next 24 months, at what price does it become too much? ALGN stock trades at a very full 60 times this year earnings and about 48 times next year’s estimates.
If we’re lucky, ALGN will do $2 billion in sales this year. Its market cap is $23 billion. For reference, Facebook Inc. (NASDAQ:FB) trades with a similar price-to-sales ratio, but has operating margins that are twice that of ALGN.
That said, the valuation doesn’t seem to be an issue right now, particularly now that earnings are starting to play catch up. But it’s something investors may want to keep an eye on.
Also pay attention to guidance. Analysts’ estimates exceed the top end of management’s second-quarter outlook for earnings and are right at the top end for their revenue forecast.
Without a top and bottom line beat, Align stock could falter with this high of a valuation. Although, it’s worth noting that ALGN has beaten both estimates four times in a row.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
