Align Technology (NASDAQ:ALGN) dropped sharply at the open despite beating earnings and revenue estimates. The San Jose-based manufacturer of scanners and aligners used in orthodontics reported double-digit revenue and earnings increases. However, Align stock initially fell on weakened pricing for Invisalign.
Still, traders appeared to interpret the drop as a knee-jerk reaction. By the middle of the day, the stock erased all of the losses and had turned positive, closing up about 2.6%. Both the quick recovery and the growth of its popular Invisalign orthodontic product show that Align stock is a buy on any pullback.
ALGN Stock Is Driven by Robust Growth… And Hesitation
For the fourth quarter, ALGN reported GAAP EPS of $1.20 per share. Wall Street had expected $1.14 per share. The company earned only 13 cents per share in the same quarter last year. Revenues of $534.02 million also came in $19.4 million higher than expectations. They also increased 26.7% from year-ago levels when the company reported quarterly revenue of $421.3 million.
The stock might have experienced a carryover of some of the emotion from the previous earnings report. Like many tech stocks, ALGN stock peaked in early October. It then began to plunge. That culminated in a one-day drop of about 20% following its third-quarter earnings report.
Align stock has remained in a range since. However, the initial drop following Q4 earnings may have served as a catalyst for an upward move.
Given the Q4 numbers, it makes little sense that Align stock plunged at the market open. Yes, the average selling prices on its popular Invisalign clear aligners fell on a year-over-year basis. Invisalign differentiates Align from firms such as Dentsply Sirona (NASDAQ:XRAY) and Danaher (NYSE:DHR) — who focus more on consumables and equipment. For this reason, Invisalign-related news often drives the equity. Still, with overall profit growth much higher, that fact seems less relevant.
Earnings May Have Become a Catalyst for Align Stock
Traders appear to have come to the same conclusion. Align stock began the trading day by falling almost 7% from the previous close. However, by the middle of the day, the stock was trading above levels of the prior day.
I think the early buyers made the correct call. ALGN’s forward P/E ratio stands at around 40.
Diluted earnings also increased by 73.9% for the year to $4.92 per share. The current 2019 earnings forecast of $5.83 per share would take profit growth down to 18.5%. Still, considering those growth levels, the P/E does not appear elevated.
Admittedly, valuations had probably moved ahead of themselves following the increases ALGN saw for most of 2018. Many key patents on Invisalign expired at the end of 2017. When traders saw profit increases continuing without the Invisalign patent protection, they continued to bid up the stock price for 2018. This set up for the fall that began in October. As a result, Align stock has fallen by about 45% from its 52-week high.
However, ALGN stock now trades at a much lower multiple. With its years-long track record of double-digit earnings increases expected to continue, investors should treat any moment of panic as a buying opportunity.
The Bottom Line on Align Stock
In an ironic twist, signs of softness in pricing may have become the catalyst that Align stock needs to resume growth. ALGN handily beat earnings and revenue expectations in its Q4 report. However, the stock initially sold off as reports of lower pricing for its Invisalign orthodontic product weighed on the equity.
Still, as the trading day went on, buyers erased that loss and bid the ALGN stock price above yesterday’s closing levels. Traders likely saw an opportunity as the company growth levels remain on track. If the move higher continues, the bright smiles that Align makes possible will go well beyond the orthodontic practices it serves.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.