Align Technology

Align delivered 4% and 6% revenue and adjusted earnings per share growth, respectively, during the second quarter. Both figures were a low-single-digit percentage ahead of the FactSet consensus. Shares fell 6% in after-hours trading.

Why it matters: Strong shipment volume, up 7%, demonstrated stability in the clear aligner market despite soft consumer readings in the broader economy. The weak systems result, down 11%, indicates a weak capital environment. Aligner growth was mainly driven by international markets, a trend that has played out over the past few quarters. That said, we think the full recovery of the US, a market that accounts for over 40% of Align's sales, is crucial for the firm to return to its high-growth phase and achieve its long-term sales growth target of over 15%. Our five-year shipment CAGR sits at 9%. At 23%, the firm's adjusted EBIT margin was up 160 basis points year over year, driven by both gross margin expansion and cost controls, and is on track to meet the full-year target of 23.7%.

The bottom line: We lower our fair value estimate for narrow-moat Align to $195 from $220 after reassessing the firm's risk profile and long-term outlook. We use a weighted average cost of capital of 9.2%, up from 8.7%. Our valuation implies a 10.5 times enterprise value/2026 adjusted EBITDA multiple, and we see shares as moderately undervalued. We think Align has equipped itself to get back on offense, including new aligner innovations and lower-cost scanners, to combat macro challenges, and we see signs of them working out. But overall improvement in the orthodontic market is still likely to be the biggest needle mover in the near and midterm. Align announced it will appoint three new independent board members. While the weak market exacerbated challenges, we think these changes are strategically well suited to a firm whose stock has lagged the broader healthcare index and underperformed its long-term target for many years.

We are lowering our fair value estimate for narrow-moat Align to $195 from $220 after reassessing the firm's risk profile and long-term outlook. We now use a WACC of 9.2%, up from 8.7%. Our valuation implies 10.5 times enterprise value/2026 adjusted EBITDA

For fiscal 2026, we model 3.5% top-line growth. We expect the clear aligner segment to grow at a low-single-digit pace, driven by mid-single-digit growth in aligner shipment volume and a mild decline in average selling prices. We think systems and services will have a difficult year and model a high-single-digit sales decline from a weak capital environment.

Over the longer term, we project double-digit midcycle revenue growth. We believe this is driven by the growing middle class in emerging markets, increased focus in oral aesthetics, and an ongoing adoption of clear aligner solutions. While clear aligners make up roughly 10% of all orthodontic case starts today, we expect this number to climb over the next five years as prospective patients learn the benefits of clear aligners and their clinical viability—five years ago, Invisalign was capable of treating roughly two-thirds of cases, but it is now able to treat 90% of all cases.

We expect continued penetration in the teen orthodontic market to further fuel Align’s top line. Two-thirds of all orthodontic cases come from teen patients, but only one-fourth of Invisalign’s patients are teens. This is mainly due to the more complex nature of cases for young patients and the limited historical precedent of clear aligners being available for teens. However, Align is tackling these issues by providing solutions that are specifically designed for young patients as well as focusing its marketing strategies to target teens and their parents. As teen-focused strategies materialize over the next five years, which we view as likely, we expect more GPs and orthodontists to gain more young patients seeking Invisalign as solutions for their problems, and for this to act as a nice tailwind for Align.

We assign Align Technology a narrow moat rating. We believe intangibles from Invisalign's strong brand recognition and technically advanced products combined with switching costs from doctors' unlikeliness to move to a different product support Align's economic profits for at least the next 10 years.

As a first mover in the clear aligner industry, Align has had many years of experience to become the world’s largest 3D printing business and make its product one of the best-performing clear aligners in the market. It first introduced Invisalign after it received FDA approval in 1998. Invisalign is the world’s first complete clear aligner system and has become a household name. With over 25 years of experience, Align has amassed industry-specific knowledge to continue developing its products and increase clinical viability—out of 25 million orthodontic case starts every year, Invisalign can treat over 90% of cases. Some sources suggest Invisalign systems can achieve greater than 75% improvement in overall tooth movement predictability compared with regular clear aligners, and they are surveyed to be more comfortable and less painful. Also, Invisalign, on average, requires a shorter treatment time and offers many more different types of aligners depending on the severity of case and patient profile. We believe Invisalign is the clear market leader and favored by patients—more than half of prospective adult orthodontic patients request Invisalign treatment.

With all of the aforementioned attributes, Invisalign is able to assign a pricing premium and justify its higher cost. On average, Invisalign costs patients $3,000-$8,000, or higher than other clear aligner alternatives in the market which typically cost patients $2,000-$6,000. Despite the pricing premium, Invisalign still controls over 70% of the US clear aligner market, which we credit to its quality and reputation, supported by years of clinical research and patient surveys.

General practitioners and orthodontists first have to register for an Invisalign course and go through training to be a licensed Invisalign doctor. During the course, doctors learn, among other things, how to identify case types and the corresponding Invisalign and how to integrate Invisalign solutions into their practice. Once the course has been completed, Align also offers 90 days of full support and guidance through ClinCheck, the company’s proprietary 3D treatment plan that simulates desired tooth movement and illustrates the course of a treatment. The cost and time that is spent during the onboarding process should deter doctors from adopting a different clear aligner, especially since Invisalign is the industry-leading option that is favored by patients.

Doctors benefit from continuing to adopt Invisalign solutions and expand their patient base because they can earn volume-based discounts. These cost savings can significantly lower the price doctors pay per case, with the highest Invisalign-prescribing doctor paying up to 40% less than the original price. Because of this financial incentive, more and more GPs and orthodontists are likely to suggest Invisalign if it is a viable treatment option, and we see this in action—the Invisalign utilization rate, which is calculated by the number of delivered cases divided by the number of doctors, has been steadily growing for orthodontists in the Americas, from 24 in 2012 to about 100 today, a 300% increase. And Invisalign continues to announce new products that can handle more patients and a wider variety of case types. We believe the increasing number of offerings from Invisalign and technically advanced products should continue to push doctors to adopt Invisalign solutions and make the relationship between doctors and Invisalign stickier and more costly to break away.

We see Align as also benefiting from switching costs from its iTero scanners. The iTero intraoral scanner is an optical impression system sold alongside computer-aided design software, utilized in dental offices for orthodontic and restorative digital procedures. The digital data captured by the device can be submitted to Align and is used in the 3D printing of patient Invisalign cases (orthodontic) and in the manufacturing of dental implants and other prostheses (restorative). While the Invisalign system has third-party interoperability across other intraoral scanners (manufactured by 3M, Dentsply Sirona, and 3Shape), images from iTero scanners make up roughly half of all digital scans Align uses. The percentage of Invisalign system case submissions coming from digital scans is rising year over year, up from 25% of total cases submitted in America in 2013 to more than 90% today, demonstrating the increasing importance of iTero scanners and the overall digitalization of dentistry.

The lack of interoperability between iTero and competitor clear aligner platforms serves as a switching cost to orthodontists and GPs who have invested in one or more scanners (which currently retail for around $50,000). Additionally, Align offers a purchase discount for the scanner based on the volume of Invisalign cases submitted over a subsequent three-year period, a further incentive to use Invisalign over competitors. Furthermore, according to a peer-reviewed study published by The Journal of Clinical Dentistry, orthodontic practices that adopt iTero scanners bring in an additional 12.4 Invisalign cases and increase sales by more than $65,000 across the first 12 months. Beyond the explicit cost considerations, use of the scanner and software become central to orthodontic dental workflows once integrated due to resulting shorter chair time per patient, increased efficiency, and lessening need for additional assistants, and switching away would involve the added time and expense of familiarizing an office on a new system.

Invisalign is likely to win over new doctors and patients as adoption of clear aligners increases and chips away at wire and bracket market share.

Invisalign can continue to expand its presence in the underpenetrated teen market, with more offerings and effective marketing strategy.

More dental and orthodontic offices are likely to purchase iTero scanners as they adopt digital solutions, and Align will benefit from higher sales as well as synergies created from the Exocad acquisition.

Increasing competition in the clear aligner market could erode Invisalign’s market share over the long term.

Tariffs on Mexico could squeeze Align's margin because the firm manufactures clear aligners in Mexico and ships to the US.

Aligner treatments are largely an out-of-pocket expense for patients, leaving demand susceptible to macroeconomic changes.