We scour the net for great ideas, so you don't have to
Claim this username to collect earnings from this post, and the portfolio!
Align makes dental braces (alongside other stuff) which meant that when everyone was locked down and didn't feel as self conscious due to now living like Doreen, they went to go get braces, buy a Peloton and use Zoom. All of those have sharply corrected- except Align.
Already, Align is very overvalued. Currently trading at a p/e of 32x 2023 estimates and a current price/sales of 9x this is a TAMsanity story of it's own. Management recently marketed their Chinese operations as a huge growth and demand story, while failing to disclose that sales had materially decreased. They were subsequently sued https://www.prnewswire.com/news-releases/rm-law-announces-class-action-lawsuit-against-align-technology-inc-301027065.html
With such aggressive growth, one would think management would also believe that story, right? Nope. They've sold nearly 124M in shares beginning 2021http://openinsider.com/screener?s=ALGN&o=&pl=&ph=&ll=&lh=&fd=730&fdr=&td=0&tdr=&fdlyl=&fdlyh=&daysago=&xp=1&xs=1&vl=&vh=&ocl=&och=&sic1=-1&sicl=100&sich=9999&grp=0&nfl=&nfh=&nil=&nih=&nol=&noh=&v2l=&v2h=&oc2l=&oc2h=&sortcol=0&cnt=100&page=1
Management have given aggressive guidance for Q4 earnings on Wednesday which I believe they'll miss, party due to a change in consumer trends. From google trends we can see that https://trends.google.com/trends/explore?date=today%205-y&q=invisalign searches have trended downwards since re-opening has begun. This is also replicated on both Instagram and TikTok https://imgur.com/a/DrDnjbw, which was stressed an effective advertising channel in the Q3 earnings call. Revenue was flat from Q2 to Q3 of 2021, and this is not some cyclical business. The market will eventually price in the fact that people aren't growing four sets of teeths and that direct to consumer plans are not only cheaper, but increasing in market share- although not as good.
There are also some accounting red flags. Total Inventory has been on the climb from 129M in Q3 2020 to 207M in Q3 2021 (a 60% increase), while day sales outstanding (DSO) has gone from 71 to 75 in the same period. From 2017-2020 it went from 80 to 97 (22% increase). Why is this so high? You're not allowed to take home an Invisalign without paying (Duh) and payment plans are clearly not the reason as we don't see the same effect amongst competitors. If their products are manufactured in Mexico and are in high demand, they should not have such a large inventory and a huge net receivables account, as they deal with related parties. Data from here: https://www.nasdaq.com/market-activity/stocks/algn/financials
Additionally, since they manufacture in Mexico and shipping prices have skyrocketed (though it's made clear in their 10K) they're likely to see pressure on their margins. This is in the form of containers to Asia markets and land transport to the US market.
Position: Short ALGN, will buy puts on on the day. With a revenue miss, I see a potential 10-40% downside.
Inspired the by very good DD by Unemon: http://unemon.com/ResearchEasy/202201_ALGN/202201_ALGN_SHORT_1OUT2.html