Align Technology (ALGN -0.65%) and Abiomed (ABMD) have a lot of traits in common. They are both medical device companies that dominate their respective niches. They have each reached profitability and have been grand-slam investments so far.
While both still hold massive growth over the next few years, partly due to the sticky nature of medical device products, one of these two gems is the better buy today.
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The bull case for Align Technology.
Align is a leading player in the orthodontic market. The company best known the Invisalign system offers patients with misaligned teeth an alternative to traditional braces. The Invisalign system is a series of clear aligners that patients wear on their teeth regularly in order to gradually move their teeth into the correct position.
Invisalign offers patients numerous benefits over traditional metal-and-wire braces. The aesthetics are superior, there are fewer eating restrictions, and Invisalign can be easily removed.
These perks have convinced millions of patients to choose Invisalign over braces. The growing popularity has allowed Align's revenue and profits to grow at a double-digit rate for many years. Its stock price has responded in kind. Shares are up more than 2,600% over the last decade.
There are plenty of reasons to believe that the company is still in the early innings of its growth stride. Management states that 12 million patients annually could benefit from its current technology within its target markets and that it has only captured about 13% of that opportunity thus far.
Offsetting all this growth potential are a few reasons to be cautious. The biggest threat facing the company right now is incoming competition from a company called SmileDirectClub. SmileDirectClub allows patients with misaligned teeth to bypass the orthodontist and receive custom clear aligners directly through the mail, which cost about 60% less than Invisalign.
Align's management team isn't blind to that threat but they do not appear to be worried. A key reason is that SmileDirectClub encourages patients to bypass the orthodontist, whereas Invisalign works directly with them. That fact has upset the dental community at large so much so that both the American Dental Association and the American Association of Orthodontists have strongly advised against using the SmileDirectClub product.
Another fact that should calm investors' nerves is that Align owns 19% of SmileDirectClub and is also an exclusive provider of its aligners. That means that the company should benefit financially if its primary competitor succeeds.
Those arguments appear to have fallen on deaf ears with investors as of late. Align's stock is down more than 40% from its recent high after management recent lowered its near-term growth projections. Traders could be worried that the competitive threat is a bigger deal than management is planning for.
Even with the growing competition, market watchers expect huge profit growth from Align over the next couple of years. Current estimates call for profits to grow more than 24% annually over the next half-decade. If that number proves to be accurate, then buying Align's stock at a discount now might make a lot of sense.
The bull case for Abiomed.
Abiomed is hyper-focused on diseases of the cardiovascular system. The company sells a range of miniaturized heart pumps called Impella, which are used in two major cardiac procedures: cardiogenic shock (recovering from a heart attack) and protected percutaneous coronary intervention (keeping blood flowing during high-risk heart surgeries.)
Demand for Impella has exploded over the last few years as more physicians are educated on the benefits of using the device. The huge sales growth combined with operating leverage has created triple-digit profit growth.
As cardiovascular disease is a leading cause of death, the market for both of these indications is huge. Management estimates that 220,000 patients could benefit from Impella annually. The company believes that it has only captured 10% of market opportunity in the U.S. and even less in foreign markets like Japan and Germany.
As if that opportunity alone weren't exciting enough, the company's pipeline is also packed with devices that could potentially expand its market opportunity by more than 300,000 patients each year. In other words, Abiomed still has a massive runway for growth ahead of it.
While it's largely been a rocket ship for the last decade -- up 1,870% since 2008 -- Abiomed stock has dropped significantly over the past few weeks. The primary reason for the sell-off was good, but not great, results from a clinical trial that could significantly expand its addressable market. While the trial is progressing nicely, Wall Street was expecting to be wowed and sold the stock in response.
Even with the discounted price, shares cannot be called cheap. They trade for 67 next year's estimates, which is a valuation that is still pricing in a lot of growth.
Offsetting that huge premium is that fact that market watchers currently expect Abiomed's profits to expand at more than 28% annually over the next five years. If the company can meet that target, then its premium could be more than justified.
The better buy
I firmly believe that there are good reasons for investors to buy both of these stocks today. However, when forced to choose, I have to give the edge to Abiomed. The primary reason is Abiomed's virtual monopoly in temporary heart pumps makes it incredibly hard for any competitor to displace it. While I'm not too worried about the incoming competition for Align, it would be a mistake for investors to dismiss SmileDirectClub it completely.
