Is the sky falling for DexCom(NASDAQ: DXCM)? Shares of the medical device specialist dropped off a cliff following its second-quarter earnings report. Unfortunately, the diabetes-focused company failed to impress investors yet again with its most recent quarterly update.
At about $69 per share, DexCom's stock isn't that far off its 52-week low of $62.34 and is miles away from its 52-week high of $142. However, there remain good reasons to invest in the company.
DexCom's near-term issues
Let's first review what DexCom does. The company is a leader in the market for continuous glucose monitoring (CGM) systems, which allow diabetes patients to keep track of their blood glucose levels efficiently throughout the day and night. It recently launched the G7, one of the most advanced CGM systems.
However, the rollout of the G7 in the U.S. came with some complications related to rebate eligibility, with many more patients taking advantage of rebates than anticipated.
That was one of the issues during the second quarter, exacerbated by the company's slowing growth in international markets. These issues carried into the third quarter, when revenue for the period increased by just 2% year over year to $994.2 million. Investors would expect a company with a forward price-to-earnings ratio (P/E) of about 40 to grow its revenue at a much better rate.
DXCM PE ratio (forward), data by YCharts.
The average P/E for the healthcare industry is 18.2. And the company's adjusted EPS of $0.45 was lower than the $0.50 reported in the year-ago period. There wasn't much to celebrate in the quarterly update, but let's consider why the company's prospects remain attractive.
Planning for the long game
What do the headwinds DexCom has encountered lately mean for its investment thesis? As far as the rebate eligibility problem is concerned, it doesn't mean much. That's a short-term issue that won't matter anymore in a couple of years.
Its slowing growth in international markets is more worrisome, but even then, it's important to look at the bigger picture. The company has historically increased its addressable market by entering into new territories. It still has plenty of room to do so. As its biggest competitor in the CGM market, Abbott Laboratories, pointed out, only 1% of the world's half-billion adults with diabetes have access to CGM technology.
Not all are eligible for it, but the ones who are make up more than 1%; this underpenetrated market could give DexCom significant growth potential beyond the next decade. It is still looking to expand worldwide.
Chief Financial Officer Jereme Sylvain said: "There remains a long runway ahead for DexCom CGM globally. We continue to invest in infrastructure to expand our geographical presence, provide compelling evidence to expand market access in new segments of key markets, and leverage our product portfolio to meet the unique needs of various customers and health systems."
The company recently got expanded insurance coverage in France and released an over-the-counter CGM option in the U.S., called Stelo, for diabetics who aren't using insulin.
And DexCom is building a network effect since its CGM systems are compatible with a host of other devices and third-party apps -- from insulin pens and pumps to the Apple Watch, among many others -- to help simplify the lives of diabetes patients.
The more patients are in its ecosystem, the more attractive it is for other device developers to opt for compatibility with DexCom, attracting more customers. That's an important competitive edge that should allow it to remain a leader in its market for some time.
DXCM total return level; data by YCharts.
The stock's valuation could make it somewhat volatile in the near term. But that's nothing new for this company. DexCom shares have generally been a bit erratic, but in the long run, they have moved in the right direction. I expect the same to continue. So, despite its issues, now is a good time to invest in DexCom.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool recommends DexCom. The Motley Fool has a disclosure policy.
