Morningstar | Align's Intangible Assets Warrant a Narrow Moat, but Patent Expirations Imply a Negative Trend
We are initiating coverage on Align Technology with a narrow moat rating and $300 fair value estimate. We contend that Align's narrow moat is underpinned by intangible asset strength thanks to its proprietary manufacturing technology and analytics, and we expect the company's brand recognition will also help to protect the company's healthy return on invested capital profile. While Align's barriers to entry have traditionally been high thanks to its patented manufacturing processes, we think several key patent expirations are weakening the company's competitive position, which partially drives our negative moat trend rating.The company's first mover advantage in the clear aligner market has morphed the company into a global orthodontic powerhouse, essentially monopolizing the market. Align successfully proved clear aligner efficacy relative to traditional wire and brackets, and the company's InvisAlign brand has become synonymous with the broader product category as a result. The company's digital manufacturing workflow has enabled significant efficiency and convenience for orthodontic professionals and patients alike, whereas general practitioners with very limited orthodontic expertise can also sell aligners thanks to InvisAlign's automated treatment planning software. We think Align’s international strategy is positioning their digital workflow in a similar way that enabled its outsized growth in the U.S. Separately, we think the company's new retail effort represents a healthy growth opportunity.
We expect significant case growth in the U.S. and internationally during our forecast period, as we expect the company's first mover advantage to persist in its regional expansion efforts alongside continued penetration in its existing markets. Furthermore, we expect the company's expertise in complex products will support its clear aligner pricing until competitors catch up in terms of scale. Our valuation implies a price/earnings multiple of approximately 60.
Align Technology is a medical device company engaged in the design, manufacture and marketing of Invisalign? clear aligners and iTero? intraoral scanners and services for orthodontics, restorative and aesthetic dentistry. The company's segments are: Clear Aligner, which includes the Invisalign System, a method for treating malocclusion based on a proprietary computer-simulated virtual treatment plan and a series of doctor-prescribed, custom manufactured, clear plastic, removable aligners; and Scanners and Services, which includes Intraoral scanning that enables the dental practitioner to create a 3D image of the patient's teeth (digital scan) using a handheld intraoral scanner.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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