In our second deep dive we came up with the following insights that make the market for clear aligners worth watching:
- Macro-environment is ripe for more discretionary spending on cosmetics because two-thirds of the world’s population will join the middle class by 2030
- The path for consumers to straighten their teeth can be frictionless, but that may not be what customers want
- The barrier to entry is relatively low, leaving distribution as the primary driver of competitive advantage
Macro-Environment — A global middle-class boom will drive demand for clear teeth aligners
As middle-class populations around the world continue to grow at unprecedented rates, so does the desire for a pretty smile. According to a report from Visa, the middle class is expected to grow to ⅔ of the entire global population.
Generally, middle classes in developing countries have cash to spend on discretionary products and services, like cosmetics and specifically teeth alignment. For more emerging nations around the world, products and services like teeth alignment is seen as a luxury. However, this may be shifting with the growing populations of emerging and even frontier markets. From a Grandsview Research Report, the “global clear aligners market size was valued at USD 2.2 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 23.1% from 2020 to 2027.”
One of the largest benefactors is Align Technologies (ALGN), the medical device company that designs, manufactures and markets the very popular Invisalign Clear Aligners. ALGN will be the main focus of this article, while we will mention both Smile Direct Club (SDC) and ClearCorrect (acquired by Straumann Group in 2017).
First Person Experiences-Straightening teeth is no walk in the park
During our research, we spoke to 2 different ALGN users and a dentist who is Invisalign certified and provides ClearCorrect (Dentist). Ultimately, we came up with these key insights:
- It is not a defensible product or service
- The human laziness factor plays to these companies’ advantage
- SDC has a questionable reputation from both consumers and health professionals
The spectrum of options to move your teeth are a sliding scale up for price from metal braces to ceramic to clear aligners, while the opposite is true for effectiveness. The main reason for the latter is simply because you can’t avoid self compliance with brackets are stuck on your teeth.
It also helps to start with the differences between a dentist and an orthodontist. Orthodontist means 3–4 more years of school for a dentist, and learning how teeth move and why.
Initially, ALGN was only available directly through an orthodontist because of their experience and traing on how teeth move and why, and it still requires one to diagnose a “treatment” based on the results desired. The remote ALGN orthos must answer 2 questions: (1) How many trays? (more movement, more trays); (2) How long? (1 yr most common). The dentist and mostly the patient do the rest. This is the the ALGN and ClearCorrect business model, but SDC is different.
SDC has their own retail spaces where they provide their services and product. Everyone we spoke to had reservations about SDC. What worried the Dentist was something that took 6 months of classes to learn, impressions, SDC often expects their patients to take themselves. One reason this is problematic to the Dentist, is it can make it difficult to detect bone loss. Attempting to move the teeth of someone with bone loss can cause their teeth to fall out. Some additional research found that for the past 2 years there have been multiple complaints, but that NDAs were used by SDC to stifle bad reviews.
ALGN and ClearCorrect are offered by dentists and orthodontists who are in the service business, it adds accountability to the brand that buyers are accustomed to with medical products.
Competitive Landscape and Fundamental Analysis — ALGN is an incumbent in an industry ripe for disruption, but they have a big advantage in their scale of distribution
First, the newcomer, SDC. Although SDC, with a market cap of $4.3 billion is tiny compared to ALGN at $41 billion, it is disrupting the industry as it requires the least amount of effort to purchase and has the lowest price. SDC is poised to take advantage of the boom in tele-health, as it requires very few in-person interactions. It is not profitable, however, it is forecast to become profitable over the next 3 years and revenues are projected to grow at 22% year-over-year for the next 5 years.
In such a competitive industry with low barriers to entry and a growing global middle class, owning international distribution is essential to long-term growth. ALGN is making a strong push, forming a collaboration with Zimmer Biomet Dental to leverage their extensive direct global salesforce and network of dental clinicians and laboratories to help drive further penetration of Invisalign and provide access to clear aligners through the iTero platform. Recurring revenue may get a bump with the global release of ALGN’s proprietary treatment planning software (iTero), which is currently growing at 33% YoY internationally. This push for international distribution is reflected in the graph below.
ALGN’s fundamentals are very strong. ALGN has a very strong balance sheet with over $2.5 billion in total assets and less than $60 million in debt, thus, providing the company with plenty of stability and flexibility to help through this current time of uncertainty. It could easily choose to ratchet up the leverage to facilitate international expansion and other partnership growth opportunities. Additionally, ALGN increased revenue by 33% year over year in 2018 and 2019 by 33% and 22% respectively. Although, revenue did decrease in 2020, it was only by -5%. This decrease in revenue was in large part due to Covid and the inability of dentist and orthodontist to see their patients to market and install new products. However, in 2020 they were still able to maintain a 76% profit margin and $415 million EBITDA. It is projected that over the next 5 years ALGN will be back on track to growing its’ revenues by double digits. ALGN‘s ability to grow revenue while maintaining a healthy profit margin and limited debt should result in a BEAUTIFUL smile from its shareholders.
ALGN current price as of 1/29/2021: $525.38.
ALGN is currently bouncing between a range of its’ all-time high of $579.50 and it’s 50 day moving average of $514.71. The stock is having difficulty breaking through its median Bollinger band of $545. If it is able to do so it will likely run to its’ all-time high of $579 where it will meet some resistance and will then decide if it wants to fall back to its’ 50 day moving average or climb higher. On the downside, ALGN as mentioned earlier has some support at its’ 50 day moving average of $514.71. If it were to fall through its’ next strong support is $446 its’ 100 moving average. Look for ALGN to trade within a range of $514.50 and $575, and if it were to break through either direction it could have legs.
Conclusion — Add it to the watchlist
Over the next 7 years ALGN will continue to grow revenues at a rapid pace based on the over 20% YoY in the industry as a whole. With this opportunity comes very tough competition likely to result in tighter profit margins. However, due to a recent run up in the stock price, it seems a bit overpriced and could possibly be purchased at a later date for a more favorable price. If you’re investing for the long term, ALGN deserves to be added to the watchlist.
DISCLOSURE: As of February 1, 2021, Authors have no current position in any of the securities discussed in this article.
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