Is Dexcom Stock A Buy?

DexCom, Inc. [NASDAQ: DXCM] is a medical device company primarily focused on the design, development and commercialization of continuous glucose monitoring (CGM) systems for people with diabetes.

Its products include DexCom G6, Dexcom G7, and Dexcom Share, a remote monitoring system used to transmit glucose information to the cloud and then to apps on the mobile devices of designated recipients for glucose monitoring. 

With 500 million+ people suffering from diabetes, DexCom has massive market potential to address. But what does it mean for DXCM share price?

The Bull Case for DexCom

DexCom designs, develops, and markets continuous glucose monitoring (CGM) systems for people with diabetes.

The company launched its first product in 2006, its latest model, the G6 integrated Continuous Glucose Monitoring System (iCGM) in 2018, and is currently preparing to launch its G7 device.

Dexcom’s CGM and iCGM technology has been developed to continuously measures glucose levels in Type 1 and 2 diabetes patients to prevent episodes of hypoglycemia (low blood sugar levels which can cause symptoms such as hunger, trembling, heart racing, nausea, blackouts and dizziness), and hyperglycemia (elevated blood sugar levels which can lead to excessive hunger and thirst, rapid heartbeat, vision problems and vomiting).

CGM devices have mass market appeal given the fact that just under half a billion people are living with diabetes worldwide and the number is projected to increase by 25% in 2030 and 51% in 2045 to reach around 700 million.

There are a number of positives going DexCom’s way.

The company has a substantial first-mover advantage in a market with high barriers to entry. More importantly, the management has been increasingly focusing on expanding the reach and awareness of its products through investment in marketing, manufacturing and technology. 

In order to enhance awareness about its products, DexCom came out with a Super Bowl ad where it is seen extolling the virtues of its products, which allow continuous glucose monitoring without the need for finger pricking.

The company believes that increasing awareness about its offerings is important for fast tracking growth, as there is a large population, both in the US and across the globe, unaware that the product exists – including people who are using rival products such as Abbott’s Freestyle Libre device, or Medtronic’s Guardian Connect.

The glucose monitoring device manufacturer is also keen on developing its international sales, and to achieve this objective it has opened offices in in Austria, Canada, Germany, the Philippines, Switzerland, and the United Kingdom.

As per the company’s management, there are around 6 million patients requiring Intensive Insulin Therapy (“IIT”), with around 25% patients using the company’s GCM product.

The company believes that in the next few years, it could grow to around 13 million, with DexCom expecting to capture a larger share of this population through measures such as direct-to-consumer marketing, e-commerce and ad campaigns, to name a few.

DexCom currently has two manufacturing facilities in the US – in San Diego, and Mesa, Arizona. A third manufacturing facility is currently under construction in Malaysia.

All these efforts seem to be paying off well for the firm, as it has allowed the company to achieve spectacular revenue growth – from $402 million in revenue in FY15 to $1.93bn in FY20, at a CAGR of close to 50%.

DXCM Quarterly Report Financial Highlights

Dexcom’s second quarter performance was characterized by strong financial results and the continued advancement of its key strategic initiatives.

Revenue for the company grew 32% to $595.1 million, up from $451.8 million in the second quarter of 2020.

DexCom witnessed a revenue jump of 26% in the US, while international revenue growth soared 58%.

The medical device company reported $0.76 earnings per share for the quarter, against consensus estimate of $0.43.

As of June 30, 2021, Dexcom held $2.58 billion in cash, cash equivalents and marketable securities with its cash balance representing significant financial and strategic flexibility as Dexcom continues to expand production capacity and explore new market opportunities.

Moreover, there’s also the possibility of DexCom expanding far beyond the current diabetes monitoring tool into other general health monitoring tools, as well as into international markets.

A lot will also depend on DexCom’s desirability and resources to compete with its larger rivals such as Abbott (ABT) and Medtronic (MDT) whose diabetes medical device segments account for around 10% and 8% of total company revenues, respectively.

All in all, DexCom looks poised for strong future growth given the vast size of the diabetes market (expected to reach around $15 billion by 2024), massive unmet need for a better solution to glucose monitoring, and DexCom’s growing ability to take care of that demand.

The Bear Case for DexCom

The question that foremost comes to mind is that why would diabetics persist with the old-fashioned finger sticking to know their blood sugar level when there is a better alternative in the market – a continuous glucose monitoring system that is more accurate, more convenient, and reveals their blood sugar levels in real time.

The simple answer is the exorbitant cost of the latter which puts it beyond the reach of a large chunk of the diabetic population.

A DexCom G6 transmitter, without insurance coverage, could cost you anywhere between $245 and $260, but they are also listed at prices reaching into the $300s. The sensors that are to be inserted under your skin need replacement every 10 days or so, and are priced between $100-115 each.

Though people with insurance coverage can breathe somewhat easy, GSM, undoubtedly, is still a very expensive treatment.

Dexcom continuous glucose monitoring system competes with Abbot’s FreeStyle Libre 2 which is used to measure glucose levels in adults and children with diabetes.

Dexcom competition poses a serious price threat. Many observers believe that Abbott will continue to expand at DexCom’s cost, because its Libre device is just one-third of the price of a G6 or G7 device. 

It offers real time alarms, and its sensors last 14 days, not 10. Additionally, its sensor is very easy to insert and invariably painless. But, most important of all, one should not forget that insurers are more interested in cost rather than the level of comfort or ease of use the products offer.

Here, too, Abbot’s GSM steals a march as it is significantly cheaper. A Libre reader costs around $115, and sensors cost only $65 without insurance.

This huge difference in price means that Abbott’s Libre 2 will be the preferable CGM of diabetics as well as insurers around the globe, more so in developing countries where incomes are typically lower than those of the developed economies.

DXCM Valuation Demands Earnings Must Soar

DexCom, no doubt, has handsomely rewarded its investors with its share price rocketing more than 450% in the last five years.

However, it is imperative not to lose sight of the fact that it’s a niche company serving a niche market, which makes its current sky-high valuation extremely hard to justify.

The company needs to double its earnings consistently for a decade or two to do justice to its current valuation.

The prospects of robust future growth also look less likely given the fact that Abbott has introduced a cheaper CGM into the market. This, apart from putting intense price pressure on DexCom, is also likely to limit its expansion into more a price-conscious market.

Abbott (ABT) is a big company with huge resources at its disposal and, as such, DexCom investors will do well to keep a close eye on Abbott’s Libre product line, and also on DexCom’s high valuation and whether the company’s growth prospects are bright enough to justify the stock’s prohibitive price.

DexCom Stock Price Forecast

1-year price forecast for DexCom’s stock ranges from a high of $550.00 to a low of $475.00.

On average, DexCom’s share price is expected to reach $500.80 in the next one year.

Is DexCom Stock A Buy?

The decision to invest in DexCom could be considered a pretty straightforward one given the fact that the company makes continuous glucose monitors, or CGMs.

The body-worn medical devices help diabetes patients keep track of their blood glucose levels in real time.

Diabetes is a serious medical condition, with Center for Disease Control and Prevention (CDC) data revealing the ailment to be the seventh leading cause of death in the country.

About 10% of the US population has diabetes, and around 90 million are pre-diabetic.

People suffering from diabetes need to keep a continuous track of their blood glucose levels, which means there’s a mass market appeal for Dexcom’s products.

The same is reflected in its stock price, which is up by a considerable 52% over the past three months.

Dexcom Growth Driver: Continuous Glucose Monitoring

Dexcom’s main product is its G6 CGM System.  The device allows for continuous glucose monitoring, and as such is a huge improvement over the old-fashioned glucose monitoring system of finger pricking, which delivered reading only when required.

Dexcom’s primary growth driver continues to make significant headway as awareness about the product and the convenience it offers spreads both in the US and abroad. As a result, the company has been posting strong financial results.

During the second-quarter, Dexcom generated $595 million in revenue, an upswing of 32%, compared to the total revenue of $452 million for the second quarter of 2020.

The $143 million in absolute dollar revenue growth compared to the second quarter in 2020 represents the highest quarterly increase in DexCom’s history. U.S. revenue totaled $462 million in the second quarter compared to $367 million in the second quarter of 2020, representing growth of 26%. 

International business grew about 58% in the second quarter, totaling $134 million. The company’s second quarter gross profit was $417.1 million or 70.1% of revenue compared to 64.1% of revenue in the second quarter of 2020.  

Buoyed by strong second quarter performance, the company once again raised its full year 2021 revenue guidance. DexCom now expects 2021 revenue to be between $2.35 billion to $2.4 billion, representing growth of 22% to 25% over 2020.

There is a lot of room to grow for Dexcom, both in the U.S. and abroad. As per the company’s management, the Type-1 market remains less than 50% penetrated and the Type-2 intensive market is less than 25% penetrated, representing a huge growth opportunity for Dexcom.

The company also presented strong preliminary data for its next-generation G7 CGM System at the International Conference on Advanced Technologies &Treatments for Diabetes (ATTD). DexCom recently submitted G7 for CE Mark approval thus putting it on track to begin the G7 launch by the end of 2021.

Who Are DexCom’s Competitors?

Dexcom faces strong challenge within the CGM market from Abbott Technologies [ABT] and Medtronic [MDT].   Abbot recently obtained FDA clearance for a second-generation version of its sensor based smart glucose monitoring device, FreeStyle Libre 2. 

A continuous glucose monitoring system, the device is intended to measure glucose levels in adults and children with diabetes, ages 4 years and above.  It is also currently working on its next-generation FreeStyle Libre 3 system. 

Meanwhile, Medtronic’s MiniMed 670G is an insulin pump that comes with its own CGM. It is, however, important to note that Abbott and Medtronic operate the diabetes medical device segments which accounts for roughly 10% and 8% of total company revenues, respectively, while DexCom is “all in” on iCGMs, with no alternate product lines.

The competition from Abbott, Medtronic and others, undoubtedly, presents a strong challenge for Dexcom and, as such, it is up to the company’s management to effectively deal with its better resourced, but less focused rivals.

Why Is DexCom Stock Up?

Growing awareness of CGMs helped Dexcom deliver a stellar second-quarter results. Given the market size, DexCom’s potential for expansion remains huge. Its momentum and market leadership position in the U.S. remains strong despite some stiff competition.

The firm’s international expansion strategies have been working well, and there has been growing awareness and customer satisfaction with its G6 CGM technology.

To sum it up, Dexcom is poised to remain a leader in the CGM business, which makes it a healthcare stock worth keeping a close watch on.

DexCom Investment Thesis Conclusion

The vaccination rate has picked up pace across the globe, which means the attention now has started to shift towards other medical conditions, which had usually taken a backseat during the pandemic. 

One such serious ailment is diabetes, which is growing at a rapid pace not only in the U.S. but around the world. A recent report by the World Health Organization (WHO) showed that deaths from diabetes went up 70% globally between 2019 and 2020.

DexCom is a fast-growing American medical device company, significantly benefitting from a rapidly growing diabetes market. The company manufactures and markets continuous glucose monitoring (CGM) systems for people with diabetes. The company’s G6 CGM system is FDA-permitted for use by people with Type 1 and Type 2 diabetes.

Diabetes Management Market Size Expanding

Grand View Research estimates that the global digital diabetes management market size will expand to reach around $30 billion by 2026.

According to the International Diabetes Federation (IDF), approximately 463 million adults worldwide have diabetes, and the unfortunate figure is expected to cross 700 million by 2045. According to CDC, 34.2 million people, or 10.5% of the U.S. population, have diabetes, and more than 88 million adults are pre-diabetic.

DXCM specializes in continuous glucose monitor (CGM) diabetes technology, and the rising number of diabetics around the world provides a positive market outlook for the G6 CGM system manufacturer.

The company’s G6 continuous glucose monitoring (CGM) system, allows diabetics to keep track of their blood glucose levels in real time, and also eliminates the need for painful finger pricking.

DXCM Financial Performance Is Impressive

Over the past five years, DexCom’s revenue has grown by an average of 37.5%, with the company turning profitable in 2019.

For the second quarter of 2021, DexCom reported worldwide revenue of $595 million compared to $452 million for the second quarter of 2020, representing growth of 32%.

Operating income was $101.5 million or 17.1% of revenue in the second quarter of 2021 compared to $76.7 million or 17% of revenue in the same quarter of 2020.

The management expects the company to grow at a CAGR of 15-20% until 2025, driven by the growing CGM awareness for people with Type 1 and Type 2 diabetes, continued expansion beyond the US, shifting channel mix and overall market dynamics.

DexCom Market Share Is At Risk 

The blood glucose monitoring devices market is intensely competitive with DexCom fighting aggressively for market share with Abbot’s FreeStyle Libre technology, which is also a sensor-based continuous glucose monitoring system. An important thing to note here is that Abbot’s FreeStyle Libre 2 is comparatively cheaper than that of DexCom’s G6

Last year, the company gained FDA clearance for a second-generation version of its sensor based smart glucose monitoring device, FreeStyle Libre 2. 

In September of 2020, Abbot announced that its Libre 3 system had successfully secured Europe’s CE Mark (Conformité Européenne) for its next-generation FreeStyle Libre 3 system, which is now approved for use by people living with diabetes in Europe. 

CE Mark means that a product meets the European Union’s safety, health and environmental requirements. The FreeStyle Libre 3 (which is smaller than Libre 2) has Bluetooth capability, and provides continuous, real-time glucose readings automatically delivered to smartphones every two minutes.

However, despite the stiff competition, the DexCom company is increasing its revenue at a quick pace, thanks to the company’s successful efforts to expand its addressable market.

Is Dexcom Overvalued?

DexCom is trading at a premium to its fair price.

Given the financial targets the management has set for the company up to 2025, the company’s current stock price looks too high.

Is DexCom Stock A Buy? The Bottom Line

Enhanced awareness and adaptation of DexCom’s CGM technology has been the company’s primary growth driver.  And there remains a long runway for growth in the CGM market, which is expected to register a CAGR of 14% through 2026. Also, DexCom is developing the G7, a newer, better, and smaller device. 

All in all, DexCom looks like a really attractive company with steady growth and attractive development prospects as it expands into newer markets.

The competition is tough, but the company looks on track to register 25% plus growth over the next five years. It has provided market-beating returns and delivered solid financial performance. The only concern though is the high cost of its G6 device and its excessive valuation.

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