DexCom (NASDAQ: DXCM) is a big name in diabetes care. Its continuous glucose monitors (CGMs) help people track their blood glucose levels.
But the stock has been performing poorly this year amid falling growth (the company projects an organic growth rate of around 11% to 13%, far lower than in the past). Investors have also been growing concerned about its prospects, especially if weight loss drugs can lead to a reduction in diabetes cases in the long run.
Down more than 40% this year, DexCom's stock has been in a tailspin. But while it might seem like a troubling time to own the stock, here are three reasons I would consider buying it.
1. There are significant opportunities ahead in diabetes care
I've always seen DexCom as an attractive long-term play due to the growing prevalence of diabetes, and the rising number of people who will need to manage their glucose levels with insulin. According to estimates from the Lancet medical journal, by 2050, there will be approximately 1.3 billion people in the world with diabetes.
That's more than twice the 529 million people experts estimated had the disease in 2021. In the vast majority of cases, researchers believe it will be due to type 2 diabetes and weight gain that will be behind the increase.
Given the growing popularity of glucagon-like peptide-1 (GLP-1) weight loss drugs and their ability to help people lose weight, investors could believe this will reduce the number of diabetes cases in the future. That, in turn, could diminish the need and demand for CGMs in the long run.
But it's still the early innings for many of these drugs, and it would be premature to assume they will put a significant dent in how many people develop diabetes. For many, these drugs aren't affordable solutions, and in some cases might not be practical due to their side effects.
And even if GLP-1 drugs prevent some diabetes case, the overall trend is still so significant that it should ensure plenty of demand for CGMs in the long run.
2. The launch of Stelo will expand the company's potential
An exciting market opportunity for DexCom is to offer a solution for people who don't require insulin injections or even those who might not have diabetes, but who simply want to track their glucose levels to ensure they remain healthy. The company recently launched a product just for that: Stelo.
It's the first over-the-counter nonprescription glucose biosensor that the Food and Drug Administration has cleared for use in the U.S. The device will give people insights into their glucose levels, with the data easily accessible through a smartphone.
Stelo was launched this year and could be an underrated growth catalyst. It could make DexCom's products accessible to a broader market, and thus significantly expand the company's prospects beyond just helping people with diabetes.
3. The stock's valuation is incredibly attractive
In the past, DexCom always appeared to be an extremely expensive stock, trading at a significant premium to its trailing earnings, and that was one of the biggest reasons to avoid it. But due to the sharp sell-off this year, it's now priced at a much more tenable valuation. And not only is the stock trading near its 52-week low, but if it falls much further, it also could hit a four-year low.
Investors who buy the stock today are paying around 43 times its trailing earnings. That might appear expensive, but given the long-term growth potential, it looks cheap, especially when you consider how much of a premium investors have paid for it in the past.
DXCM PE ratio data by YCharts; PE = price to earnings.
DexCom is still a great growth stock right now
Investors might not be thrilled with DexCom's slowing growth this year, but its top line is still increasing by double-digit percentages. And in the long term, there's still a huge opportunity for the business, particularly as it expands its growth prospects with the launch of Stelo.
As a leading CGM maker, DexCom is likely to play a significant role in diabetes care for years, possibly decades. Given all that growth potential, the healthcare stock looks like a no-brainer buy for the long haul, now that it's trading at a much more modest price tag.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends DexCom. The Motley Fool has a disclosure policy.
