Align Technology (ALGN) The stock that makes us Smile

Align Technology (ALGN) reported sparkling results last week, pushing shares of the Invisalign orthodontics maker to a record high, and the future is even brighter. Business is terrific. Sales rose 21% and profits shot up 50% year-over-year. But the real story investors continue to underestimate is operating margins.

Align is the company that makes those clear plastic orthodontics that re-align out of place teeth. These plastic braces are a whole lot better looking than the old wire braces invented in the 1800’s.

But it is the clever way that Align is using 3D printing that makes their operating margins truly remarkable.

We are used to ‘disrupters’ changing an industry. Think Tesla (TSLA) and their assault on the car industry. Align is disrupting an industry that has stood still for 200 years by using machine learning.

Building a sparkling smile in the digital era means gently shifting teeth millimetre by millimetre in a very orchestrated way. The math is difficult and changes for each new patient. Align uses algorithms to dictate the series of unique plastic aligners patients will wear 22 hours per day for the next 13 months.

Unique is the key word. Every Invisalign is different.

The sheer volume of aligners keeps Align’s Mexican factory humming 24/7. There, more than 50 specialized 3D printers produce 220,000 custom-made clear aligners every day, according to a Forbes story.

3D printing is the Holy Grail for manufacturing because, in theory, it eliminates inventories. Managers at Align made 3D printing the central pillar of the business model. They perfected the processes, and now they have a large-scale manufacturing business with software-like profit margins.

The company reported Q3 gross margins were 72.9%, with the operating margin surging almost 45% sequentially to 24.1%.

It’s not difficult to see the operating leverage is extreme.

Meanwhile, the core business is growing quickly again as the worst of the COVID-19 global lockdowns abate. Q3 revenues reached a record at $734 million. Invisalign shipments were up 28.7% versus a year ago, as the company shipped product to a record 70,000 doctors and its Far East business continues to expand.

The stock does trade at significant multiples but keep in mind that many parts of the world are still untapped and profits are exploding as the company works toward a true zero inventory business.

Buy ALGN on any weakness.

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