Technology stock

These 2 Huge Headwinds Are Aligning Tech Stock

Alignment technology (NASDAQ:ALGN) has achieved tremendous success in aligning the teeth of millions of people. But it’s a different story when it comes to the company’s ability to match Wall Street expectations.

On Wednesday, Align released its second quarter results. Analysts were looking for second-quarter revenue of $984.2 million and adjusted earnings of $2.23 per share. The company missed on both counts, generating revenue of $969.6 million and adjusted earnings of $2 per share.

Align already ranked among the five worst performing stocks in the S&P500 so far in 2022, and the company’s disappointing second-quarter results won’t help matters. What’s going on with the head of orthodontics? Here are the two biggest headwinds in Align right now.

1. Exchange rate

Much of Align’s revenue comes from international markets. The company does not provide details on the amount. However, in the second quarter, Align shipped just over half of its cases of Invisalign clear aligners to physicians outside of the Americas.

There is, however, a downside to Align’s strong global operations in the current environment. The US dollar is particularly strong against foreign currencies. One reason is that the Federal Reserve reacted more quickly to fight inflation by raising interest rates than central banks in other countries.

This poses a problem for Align. The business is paid in other currencies outside of the United States, but must convert those currencies to US dollars for financial reporting. When the dollar is strong, the exchange rate translates into lower sales for Align.

This is exactly what happened in the second quarter. Align said its second-quarter revenue was negatively impacted by currency exchange rates by approximately $15.3 million sequentially and $39.9 million year-over-year.

Align has felt the most sting with Invisalign sales. The company said Aligner revenue was $12.3 million lower than it would have been at constant exchange rates. Align Imaging Systems and CAD/CAM Services revenue decreased by $2.9 million due to foreign exchange.

However, it’s not just incomes that have felt the brunt of the strong dollar the most. Align’s second-quarter operating margin of 19.4% was 1.1 points lower sequentially and 2.4 points lower year-on-year than it would have been without the unfavorable impact of currency movements.

2.COVID-19

COVID-19 stands out as the other major headwind for Align right now. CEO Joe Hogan noted in the company’s press release announcing its second quarter results that the orthodontics market continues to be impacted by the “ongoing effects of COVID-19 variants in certain markets.”

This is not a new problem, of course. Align’s business was extremely disrupted in 2020, but rebounded last year. However, the omicron coronavirus variant caused issues for the company in the fourth quarter of 2021 that continued into 2022.

In particular, the Chinese market has been a sore spot due to COVID-19. China re-enacted strict lockdowns and restrictions earlier this year with its zero COVID strategy.

There were signs in the second quarter that China was relaxing its strict coronavirus regulations somewhat. However, new outbreaks in July prompted a further crackdown from the country’s government.

Out of Align’s control

Probably the most frustrating aspect of these two headwinds is that they are completely out of Align’s control. The company can’t do much about exchange rates and COVID-19.

The situation may get worse before it gets better. If the United States enters a recession, the dollar could strengthen against other currencies (although this does not necessarily happen). The White House has previously warned that another wave of COVID-19 could hit the United States in the fall.

However, things will get better sooner or later. In the long term, the commercial success of Align will matter far more than these temporary headwinds.

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Keith Speights holds positions in Align Technology. The Motley Fool fills positions and recommends Align Technology. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.