Invisalign maker’s stock craters after soft earnings, but analysts still say it’s a buy

“Our third-quarter results reflect lower than expected demand and a more difficult macro environment than we experienced in the first half of 2023,” Chief Executive Joe Hogan said in a release. “Dental practices and industry research firms have reported deteriorating trends, including decreased patient visits and increased patient appointment cancellations, along with fewer orthodontic case starts overall, especially among adult patients.”

Many consumer-facing companies are struggling with customers who are hurting from high inflation and preserving cash for essentials.

William Blair analysts said they were increasingly bullish on the stock heading into Align’s earnings but were now lowering their 2024 estimates.

“In our view, the biggest risk to owning shares at these levels remains macro weakness as evidenced by the 10% sequential decline in adult cases that make up about 70% of case volumes and are predominantly cash pay,” they wrote in a note to clients.

“Updated guidance assumes worsened September conditions continuing through the fourth quarter (management suggested October has not worsened since September), but admittedly it is unclear whether the macro backdrop worsens further and introduces more uncertainty to numbers,” they wrote.

Still, amid the gloom, they identified a few bright spots that offer support to the long-term Align story.

Teen case volumes rose 8% to outperform the broader market, which suggests the company is picking up share, they wrote. DSP volumes were up 70%, suggesting strong momentum for a relatively new commercial strategy.

DSP is a subscription program for orthodontics experts, launched last year, to assist them in coming up with effective treatment plans for patients.

Align’s cost management helped boost operating margins by 55 basis points from the second quarter and should also support per-share earnings in uncertain macro conditions, the William Blair analysts wrote.

“These and many other updates give us confidence in the underlying growth story for Align, though we acknowledge the next couple of quarters are becoming increasingly more difficult to call,” they wrote.

William Blair has an outperform rating on the stock, the equivalent of a buy.

Stifel analysts said they are trimming estimates through 2025 but expect modest revenue growth and operating-margin expansion in 2024.

“With the stock likely opening at 22x our 2024 estimate, a critical question is whether the current case volume pressure is macro or market share? We believe more macro — and with innovation to improve in 2024, we reiterate our buy rating,” they wrote.

Align posted revenue of $960 million that was up from the $890 million it recorded a year before but below the $994 million that analysts tracked by FactSet had been expecting.

The company posted net income of $121 million, or $1.58 a share, up from $73 million, or 93 cents a share, in the year-earlier period. But adjusted earnings per share of $2.14 trailed the FactSet consensus, which was for $2.26.

The company said it expects revenue to drop sequentially in the fourth quarter. Its outlook for the period, which assumes that “no circumstances occur that are beyond our control,” is for $920 million to $940 million. The FactSet consensus was for $1.02 billion.

On a call with analysts, Hogan said Europe was a weak spot in the quarter, along with the decline in adult cases in the U.S., and strength in China was not enough of an offset.

The stock is down about 10% in the year to date, while the S&P 500
SPX
has gained 8%.

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