Align Technology, Inc. (NASDAQ:ALGN) has a price-to-earnings (P/E) ratio of 39.5x, which may be sending out a very bearish signal right now, as almost half of US companies have a P/E ratio below 17x, and P/Es below 10x are not uncommon. However, there may be a reason why the P/E is quite high, and further investigation is needed to determine if it is justified.
Align Technology has been doing well lately, with positive earnings growth at a time when most other companies are seeing earnings decline. The high price-to-earnings ratio is likely because investors believe the company will continue to weather market headwinds better than most others. We can only hope so; if not, we’re paying a fairly high price for no good reason.
View our latest analysis for Align Technology
NasdaqGS:ALGN Price to Earnings Ratio vs. Industry 15 July 2024 If you want to see what analysts are predicting going forward, check out this free report on Align Technology.
Is growth justifying the high P/E?
There’s an inherent assumption that for a P/E ratio like Align Technology’s to be considered reasonable, the company must perform much better than the market.
Looking back, the company grew its earnings per share by 50% last year. Over the past three years, EPS has grown by an aggregate 5.7%, helped in large part by short-term performance. So it’s fair to say the company’s recent earnings growth has been respectable.
Turning to the outlook, analysts watching the company are predicting growth of 21% per year for the next three years. With the market only expected to grow at 10% per year, the company is well positioned to see stronger earnings results.
With this in mind, it’s understandable that Align Technology’s P/E is higher than most other companies – it seems shareholders are not very keen to sell a company that could potentially have a more prosperous future.
What can we learn from Align Technology’s P/E?
While it would be unwise to use the price-to-earnings ratio alone to decide whether or not you should sell a stock, it can be a useful indicator of a company’s future prospects.
We found that Align Technology has maintained a high P/E on the back of growth forecasts that are predictably higher than the overall market. Currently, shareholders are comfortable with the P/E as they are confident that future earnings will not be threatened. As long as these conditions remain unchanged, the share price will continue to be strongly supported.
A company’s balance sheet is another important area of risk analysis. Check out Align Technology’s free balance sheet analysis, which checks some of these key factors with six simple checks.
It’s important to find great companies and not just the first idea you see, so take a peek at this free list of interesting companies with strong recent earnings growth (and low P/E ratios).
Valuation is complicated, but we can help make it simple.
To find out if Align Technology is overvalued or undervalued, check out our comprehensive analysis, including fair value estimates, risks and warnings, dividends, insider transactions, financial position and more.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
Valuation is complicated, but we can help make it simple.
To find out if Align Technology is overvalued or undervalued, check out our comprehensive analysis, including fair value estimates, risks and warnings, dividends, insider transactions, financial position and more.
View your free analysis
Have something to say about this article? If you have any questions about the content, please contact us directly or email us at editorial-team@simplywallst.com.
