This month, video game retailer GameStop (GME 29.07%) announced that it will deploy a 4-for-1 stock split. The following day, the popular meme stock jumped more than 15%. While news of the split (to occur July 21) may be exciting for retail investors, this action on its own isn't a reason to buy the stock. It doesn't erase GameStop's losses and it doesn't improve its valuation.
A better investment to consider is DexCom (DXCM 1.36%), which makes continuous glucose monitoring devices (CGMs). The company split its shares last month, and unlike GameStop, it is backed by strong fundamentals and a promising future. Rather than jumping on the meme stock bandwagon, investors are better off investing in this top healthcare stock. Here's a closer look at why it's a better buy.
The company's margins are stronger
Investors should always consider a company's gross margin. The higher the margin, the better of a position the business is in to post a profit. And as the company grows its top line, more of that incremental revenue will flow through to cover operating expenses and overhead. One of the things I love about DexCom is that it has terrific gross margins:
DXCM Gross Profit Margin (Quarterly) data by YCharts
In GameStop's case, close to $0.80 of every dollar of revenue is going to cover cost of goods sold. The company's overhead would need to be incredibly minimal for it to have a chance of posting a profit. But that isn't the case, and over the trailing 12 months, GameStop has reported an operating loss of $475 million. DexCom, meanwhile, has posted an operating profit of $261 million over its past four quarters, which is a little over 10% of its revenue.
DexCom also has a brighter future ahead
Although there have been spikes in GameStop's revenue, the company has faced difficulties in consistently growing its business. DexCom, meanwhile, has been generating strong quarterly revenue growth over the past five years:
DXCM Revenue (Quarterly YoY Growth) data by YCharts
It's not just the past that's been better for DexCom; the future looks more promising as well. The need to help stay on top of diabetes is a growing concern. By 2050, as many as 1 in 3 U.S. adults could have diabetes, according to the Centers for Disease Control and Prevention. That's much higher than in 2010, when the ratio was just 1 in 10. DexCom's popular CGMs make living with the disease easier as they help users stay on top of their glucose levels.
GameStop, meanwhile, has an uncertain path forward. The company has been diving into crypto with the launch of its non-fungible token (NFT) marketplace this month, where users can buy and sell NFTs. In the company's quarterly earnings release last month, GameStop also noted that it was hiring people familiar with blockchain gaming. There's certainly potential there, but it's questionable how all that will pan out for GameStop; NFT sales reached a 12-month low last month.
While there's hype around crypto, that doesn't mean getting more involved with blockchain or NFTs will pay off for GameStop. DexCom's focus on diabetes and an area of healthcare is a much more sound strategy over the long term.
It may not be exciting, but better to go with DexCom
DexCom isn't a popular meme stock and it probably never will be. CGMs aren't NFTs and diabetes care is not as exciting as video games. But for investors who can look past just stock splits and the latest crypto craze, the fundamentals make it clear: DexCom offers much more value in the long term. Even if GameStop outperforms DexCom over the short term, that likely won't hold up in the long run.
