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These 2 Huge Headwinds Are Whomping Align Technology Stock

Motley Fool - Thu Jul 28, 7:26AM CDT

Align Technology(NASDAQ: ALGN) has achieved tremendous success getting millions of individuals' teeth in alignment. But it's a different story when it comes to the company's ability to get in alignment with Wall Street's expectations.

On Wednesday, Align reported its second-quarter results. Analysts were looking for Q2 revenue of $984.2 million and adjusted earnings of $2.23 per share. The company missed on both counts, delivering revenue of $969.6 million and adjusted earnings of $2 per share.

Align already ranked among the five worst-performing stocks in the S&P 500 so far in 2022, and the company's disappointing Q2 results won't help matters. What's going on with the orthodontic-device leader? Here are Align's two biggest headwinds right now.

1. Currency-exchange rates

Much of Align's revenue comes from international markets. The company doesn't provide details on just how much. However, in the second quarter, Align shipped a little more than half of its Invisalign clear-aligner cases to doctors outside of the Americas.

There's a downside to Align's strong global operations in the current environment, though. The U.S. dollar is especially strong, relative to foreign currencies. One reason is that the Federal Reserve has responded more quickly to fight inflation by raising interest rates than the central banks of other countries.

This presents a problem for Align. The company is paid in other currencies outside the U.S. but must convert those currencies into U.S. dollars for financial reporting. When the dollar is strong, the exchange rate translates to weaker sales for Align.

That's exactly what happened in the second quarter. Align stated that its Q2 revenue was negatively impacted by foreign-exchange rates to the tune of around $15.3 million sequentially and $39.9 million year over year.

Align felt the sting the most with Invisalign sales. The company said that clear-aligner revenue was $12.3 million lower than it would have been on a constant-currency basis. Align's imaging systems and CAD/CAM services revenue was $2.9 million lower, due to foreign exchange.

It isn't just revenue that felt the brunt of the strong dollar, though. Align's Q2 operating margin of 19.4% was 1.1 points lower sequentially and 2.4 points lower year over year than it would have been without the unfavorable impact of currency fluctuations.

2. COVID-19

COVID-19 stands out as the other major headwind for Align right now. CEO Joe Hogan noted in the company's press release announcing its Q2 results that the orthodontic market continues to be impacted by the "lingering effects of COVID-19 variants in certain markets."

This isn't a new problem, of course. Align's business was disrupted tremendously in 2020 but rebounded last year. However, the coronavirus omicron variant caused issues for the company in the fourth quarter of 2021 that carried over into 2022.

In particular, the Chinese market has been a sore spot due to COVID-19. China again implemented lockdowns and tight restrictions earlier this year with its zero-COVID strategy.

There were signs in Q2 that China was relaxing its strict coronavirus regulations somewhat. However, new outbreaks in July resulted in the country's government clamping down again.

Out of Align's control

Probably the most frustrating aspect of these two headwinds is that they're completely out of Align's control. There's not much the company can do about foreign-exchange rates and COVID-19.

It's possible that the situation will get worse before it gets better. If the U.S. enters a recession, the dollar could gain strength against other currencies (although that won't necessarily happen). The White House has already warned that another COVID-19 wave could hit the U.S. in the fall.

However, things will get better sooner or later. Over the long term, Align's business success will matter a lot more than these temporary headwinds.

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Keith Speights has positions in Align Technology. The Motley Fool has positions in and recommends Align Technology. The Motley Fool has a disclosure policy.

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