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Align Technology(ALGN-Q)

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This Healthcare Stock Has Been a Hotter Buy Than Amazon and Alphabet This Year

Motley Fool - Wed Aug 30, 2023

A look at share prices in 2023 suggests the market is once again hot for tech stocks. The elevated interest in the potential of artificial intelligence opened additional opportunities for companies like Amazon and Alphabet to enhance their offerings, setting the stage for more top- and bottom-line growth. It's a big part of why both stocks are trading up over 40% this year.

But that market has renewed interest in more than just tech stocks. One healthcare stock, for instance, outperformed both of those surging tech giants in 2023. Align Technology (NASDAQ: ALGN), known for making clear teeth aligners under the Invisalign brand, got a big bump from increased bullishness and the stock price is up nearly 75%.

Why is it doing so well? And is it still a good buy right now?

Align is coming off a brutal year in 2022

Last year, Align's shares plummeted by 68%. Tech didn't have a great year in general -- Amazon share prices fell nearly 50%, while Alphabet's valuation was down by 39%. Align's steeper reduction in price last year implied there would have been more room for a recovery this year, provided that there was a reason for it.

One big reason that investors are more bullish about the business is that it's back to generating revenue growth. For the quarter ending June 30, Align's sales rose by 3.4% year over year to just over $1 billion. It's not a huge growth rate, but it's a big improvement compared with 2022:

ALGN Revenue (Quarterly YoY Growth) Chart

ALGN Revenue (Quarterly YoY Growth) data by YCharts

A key market for Align is China, where COVID-19 lockdowns negatively impacted the business. This year, Chinese cities have not gone back into lockdown, and that has helped many companies, including Align, benefit from returning demand.

Another catalyst for Align is that investors may also be more optimistic about the U.S. as well; in the second quarter, GDP rose by 2.4%, beating expectations. Strong consumer spending is a good sign for Align, whose products can be expensive. In the U.S., the cost of Invisalign braces normally averages between $3,000 and $5,000. If the economy doesn't fall into a recession and remains resilient, so too could demand for Align's clear aligners.

Why Align's stock could go higher

Align's business isn't skyrocketing right now, but there is reason to be bullish on its future. According to analysts at Fortune Business Insights, the global market for clear aligners could be worth more than $17 billion by 2030, up from just $3.3 billion in 2022. That implies a compounded annual growth rate of 24.2% through the end of the decade. With Invisalign being a leading brand for aligners, Align should be a big benefactor of all the future growth in the industry.

In the near term, analysts have also been boosting their price targets for the stock in light of Align's more encouraging quarterly results. The last five price targets have come in at $400 and higher. Based on last week's closing price of $356.35, that means Align's stock could rise by at least 12%. And price targets are set typically for where a stock may go within the next 12 months. Over a longer time frame, the upside may be even greater for Align.

Is Align Technology stock a buy right now?

Align has a promising business that should generate growth for many years. The biggest issue with the stock today is its valuation. Align stock is trading at nearly 90 times the company's trailing earnings. And even based on analyst projections, you would still be paying a multiple of more than 40 times its estimated future profits.

For the stock to be a good buy at that price tag would suggest that the business is firing on all cylinders, which simply isn't the case. Align is on a more positive trajectory, but the company isn't even generating double-digit revenue growth right now. And while economic conditions appear to be strong, I'm wary of whether they can remain that way. Student loan repayments are set to resume this year, and that could put a strain on consumer spending, particularly in the younger age brackets that Align targets.

As solid as the business may be, Align's stock isn't worth buying right now.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Align Technology, Alphabet, and The Motley Fool has a disclosure policy.

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