Today I’d like to talk about one of the key elements of great companies – their value proposition. Yes, there are additional critical factors such as the management team, operating strategy and strong financials, but the core value proposition of the company is the centerpiece.
For today’s discussion, we’ll use the example of Align (symbol: ALGN). The company just announced Q1 earnings, beating expectations. Sales grew a whopping 25.7% year over year. Gross margins for the quarter were 73.2%. I won’t spend too much time on the numbers, but I highlight these figures only to make the key point that financials are a reflection of the company’s value proposition. Sales growth only comes from strong demand. Gross margins are a very good indicator for the relative strength of the company vs. competition. Without a very clear value proposition that is unique from the competition, can numbers like this be achieved.
What Does Align Sell?
Align is the medical device company that pioneered clear aligner products to straighten teeth. The product is branded under the name ‘Invisalign’. The company started in 1997. They received FDA approval in 1998 and started selling their product in 2000. They went public in 2001 and in 2016 they reached $1B in sales. In 2016, roughly 8% of those who purchased braces, used Invisalign.
What is the Value Proposition? For Doctors? Patients?
Invisalign is a clear retainer-like product that isn’t permanent like braces. They can be removed for eating. Invisalign may be preferred based on the looks and comfort compared with braces. The cost varies but is likely to be slightly higher then braces. Many dental plans cover the Invisalign product.
Technology is used extensively in the process. Imaging devices capture 3D pictures of the teeth. The Invisalign product is manufactured using 3D printing. The company is even using software applications to market the product. The app takes a picture of the patient’s teeth and then shows them an image of what their improved smile could look like.
Typically, Orthodontists are the primary providers for braces. Align is training both general dentist and orthodontists on the product. They have a rating system based on doctor experience with the product to help consumers choose a provider. The strategy of using high tech imaging, online training and expanding the channel to include general dentists is a key element to the company’s value proposition. Currently, they have over 57,000 trained providers for Invisalign. This web page gives an overview of the steps and marketing Align uses to persuade providers to adopt their technology. https://provider.invisalign.com/
What is Align’s Competitive Advantage?
First, the company was the pioneer in the field. They have a significant lead over the competition. Dentists, orthodontists and other providers invest time and money (in the 3D imaging technology). This investment means that switching to another provider creates some friction to moving to a competitor.
The process used is nothing short of amazing. The doctor creates a 3D image of your teeth. The doctor also specifies the teeth movements and steps required. The digital information is sent to Invisalign and molds are custom 3D printed from clear plastic. Software is used extensively and is deeply integrated into the process. The tools make it easier for providers to create an effective solution and they provide a barrier to entry to competition. https://www.invisalign.com/how-invisalign-works/treatment-plan
Align has the largest 3D manufacturing in the world. They have partnered with 3D Systems to make it happen.
Align has over 900 patents for their products. More importantly, the company recognizes the value of the technology innovation to improve the product, reduce providers costs and time, and by continuing to invest in the technology they hope to maintain their substantial market position.
Growth Opportunity
New 3D imaging software and 3D printing is enabling this entirely new category. Growth potential is very high with just 8-9% penetration vs braces. Align has a very aggressive plan for expansion internationally. They have recently opened two training centers in China. In addition, they have recently been focusing on teenage patients and older adults.
This is a very large opportunity and there is substantial investment by competitors. At this point, the brand lead and technology innovation using the fully digital work flow position Align to capture a large share of the growth.
Align’s value proposition and their unique competitive advantage anchored in innovation has driven strong earnings growth. The stock as more then doubled in the past two years. Morningstar currently has fair value estimate on the stock of $276 and it closed today at $296.74.
Disclosure
The author and certain clients of Brightwood Ventures, LLC hold shares in ALGN. ALGN is included in the Brightwood Quality Stock Index.
Sources:
https://en.wikipedia.org/wiki/Align_Technology
https://finance.yahoo.com/news/edited-transcript-algn-earnings-conference-035856453.html