The stock of Align Technology Inc. plummeted over 22% on Thursday, leading the decliners of the S&P 500, after the manufacturer of orthodontic aligners, Invisalign, reported earnings for the third quarter that were weaker than anticipated.Thank you for reading this post, don't forget to subscribe!
According to Dow Jones Market Data, the ALGN stock has fallen for seven consecutive days and is on track to have its largest percentage decline in a single day since July 25, 2019, when it plummeted 27%.
“Our results for the third quarter reflect less demand than expected and a harsher macro environment compared to the first half of 2023,” remarked Chief Executive Joe Hogan in a press release. “Research firms and dental practices have reported worsening trends, such as fewer patient visits, more patient appointment cancellations, and a decrease in overall orthodontic case starts, particularly among adult patients.”
Various consumer-oriented companies are grappling with customers who are feeling the effects of high inflation and are conserving cash for essential expenses.
Stating that they were growing more optimistic about the stock prior to Align’s earnings announcement, analysts from William Blair are now revising their estimates for 2024.
“From our perspective, the most significant risk associated with owning shares at these levels remains the weakening macro conditions, clearly demonstrated by the sequential decline of 10% in adult cases, which account for approximately 70% of case volumes and are predominantly paid in cash,” they wrote in a note to clients.
They continued, “The updated guidance assumes that the worsening conditions experienced in September will persist throughout the fourth quarter (management suggested that October has not worsened since September). However, it remains uncertain whether the macroeconomic conditions will further deteriorate and introduce additional uncertainty to the figures.”
Nevertheless, despite the bleak outlook, the analysts identified a few positive aspects that provide support for the long-term prospects of Align.
They noted that there was an 8% increase in case volumes for teens, outperforming the general market, which indicates that the company is gaining market share. They also pointed out that volumes for the subscription program for orthodontic experts, known as the DSP, rose by 70%, indicating strong momentum for this relatively new commercial strategy.
Launched last year, the DSP assists orthodontic professionals in devising effective treatment plans for patients.
According to William Blair, Align’s effective cost management has resulted in a 55 basis point increase in operating margins from the second quarter, and it is expected to support per-share earnings in an uncertain macroeconomic climate.
“These updates, along with many others, instill confidence in the underlying growth story for Align. However, we acknowledge that predicting the next couple of quarters is becoming increasingly challenging,” they wrote.
William Bair has assigned an outperform rating to the stock, the equivalent of a buy recommendation.
Stifel analysts stated that they are lowering their estimates until 2025 but anticipate modest revenue growth and an expansion of operating margins in 2024.
“With the stock likely to open at 22 times our 2024 estimate, a crucial question arises as to whether the current pressure on case volumes is influenced by macroeconomic factors or market share. We believe it is more likely due to macroeconomic factors, and with innovations to improve conditions in 2024, we reassert our recommendation to buy,” they wrote.
Align reported revenue of $960 million, exceeding the $890 million it recorded in the previous year but falling short of the expected $994 million projected by FactSet analysts.
The company achieved a net income of $121 million, or $1.58 per share, compared to $73 million, or 93 cents per share, in the same period the previous year. However, adjusted earnings per share of $2.14 fell short of the FactSet consensus of $2.26.
The company indicated that it anticipates a sequential decline in revenue in the fourth quarter. Their outlook for this period, assuming that there are “no circumstances occur that are beyond our control,” is between $920 million and $940 million. The FactSet consensus was $1.02 billion.
During a call with analysts, Hogan mentioned that Europe was a weak area during the quarter, along with a decline in adult cases in the US, and significant growth in China was not enough to offset these factors.
As of year-to-date, the stock has fallen by about 10%, while the S&P 500 has increased by 8%.
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