Align Technology (ALGN)

Dental technology company Align Technology (NASDAQ:ALGN) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 1.8% year on year to $979.3 million. The company expects next quarter’s revenue to be around $1.06 billion, coming in 0.8% above analysts’ estimates. Its non-GAAP profit of $2.13 per share was 7.1% above analysts’ consensus estimates.

Company Overview

Pioneering an alternative to traditional metal braces with nearly invisible plastic aligners, Align Technology (NASDAQ:ALGN) designs and manufactures Invisalign clear aligners, iTero intraoral scanners, and dental CAD/CAM software for orthodontic and restorative treatments.

The dental equipment and technology industry encompasses companies that manufacture orthodontic products, dental implants, imaging systems, and digital tools for dental professionals. These companies benefit from recurring revenue streams tied to consumables, ongoing maintenance, and growing demand for aesthetic and restorative dentistry. However, high R&D costs, significant capital investment requirements, and reliance on discretionary spending make them vulnerable to economic cycles. Over the next few years, tailwinds for the sector include innovation in digital workflows, such as 3D printing and AI-driven diagnostics, which enhance the efficiency and precision of dental care. However, headwinds include economic uncertainty, which could reduce patient spending on elective procedures, regulatory challenges, and potential pricing pressures from consolidated dental service organizations (DSOs).

Align Technology's competitors include 3M's Clarity aligners, Dentsply Sirona's SureSmile, Straumann's ClearCorrect, and SmileDirectClub in the clear aligner market. In the intraoral scanner space, they compete with Dentsply Sirona's CEREC, 3Shape TRIOS, and Carestream Dental scanners.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $3.98 billion in revenue over the past 12 months, Align Technology has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Align Technology’s sales grew at a decent 10.6% compounded annual growth rate over the last five years. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Align Technology’s recent performance shows its demand has slowed as its annualized revenue growth of 3.7% over the last two years was below its five-year trend.

This quarter, Align Technology reported a rather uninspiring 1.8% year-on-year revenue decline to $979.3 million of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 3.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.2% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its newer products and services will not lead to better top-line performance yet.

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Align Technology has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average adjusted operating margin of 22.8%.

Looking at the trend in its profitability, Align Technology’s adjusted operating margin decreased by 1.9 percentage points over the last five years, but it rose by 1.5 percentage points on a two-year basis. Still, shareholders will want to see Align Technology become more profitable in the future.

This quarter, Align Technology generated an adjusted operating profit margin of 19.1%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Align Technology’s remarkable 11.3% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

In Q1, Align Technology reported EPS at $2.13, down from $2.14 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 7.1%. Over the next 12 months, Wall Street expects Align Technology’s full-year EPS of $9.33 to grow 9.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Align Technology has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 16.2% over the last five years, quite impressive for a healthcare business.

Taking a step back, we can see that Align Technology’s margin dropped by 8.2 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Align Technology hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 19.4%, impressive for a healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Align Technology’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Companies with more cash than debt have lower bankruptcy risk.

Align Technology is a profitable, well-capitalized company with $873 million of cash and $86.49 million of debt on its balance sheet. This $786.5 million net cash position is 6.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see Align Technology beat analysts’ EPS expectations this quarter. We were also glad its revenue guidance for next quarter slightly exceeded Wall Street’s estimates. Overall, this quarter had some key positives. The stock traded up 10.3% to $191 immediately after reporting.

Updated: May 22, 2025 at 11:45 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Align Technology.

When it comes to Align Technology’s business quality, there are some positives, but it ultimately falls short. To kick things off, its revenue growth was good over the last five years. And while Align Technology’s diminishing returns show management's prior bets haven't worked out, its market-beating ROIC suggests it has been a well-managed company historically.

Align Technology’s P/E ratio based on the next 12 months is 16.9x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $227.30 on the company (compared to the current share price of $172.61).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.