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Is DexCom a Buy?

By Brian Feroldi – Updated Apr 12, 2019 at 4:08AM

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The diabetes-focused darling has been a monster winner. Is it too late to get in?

DexCom (DXCM 1.56%) has been a home run stock for early investors. Its shares have thrashed the S&P 500 over the last one, three, and five years, showing no signs of slowing.

Can this winner keep thriving? Let's dig into the bull and bear cases for the California-based company to find out.

The business

DexCom, a medical device company focused on diabetes, sells a popular continuous glucose monitor (CGM) system called the DexCom G6. This device is worn on the body and constantly monitors a patient's blood glucose levels. That data is uploaded to a handheld controller, smartphone, or smartwatch that provides information needed to keep blood glucose levels in a healthy range.

Check out the latest earnings call transcript for DexCom.

DexCom G6 systems with smarphone and watch

Image source: DexCom.

DexCom operates on a razor-and-blade business model. The permanent "razor" is the company's handheld device that receives and displays the data, while the disposable "blades" are its sensors that are inserted directly into a patient's body. After 10 days of use, they need to be properly tossed and replaced, thus providing a dependable source of recurring revenue.

This business model has allowed DexCom's top line to grow at a breakneck pace as it brings on new patients over time.

DXCM Revenue (TTM) Chart

DXCM revenue (TTM). Data by YCharts.

Reasons for optimism

DexCom's revenue growth has been incredibly impressive, and it remains strong to this day. In 2018, its top line rose by 44%, sending it over the $1 billion mark.

Can the company keep its double-digit growth rate going? The odds look good for a number of reasons:

  • Dexcom has captured less than 20% of the 3.2 million patients in the U.S. who require intensive insulin therapy. The penetration rate looks even smaller when you factor in the international opportunity. 
  • According to the company, several other groups of patients could benefit from CGM therapy. This includes people with gestational diabetes, those who require non-intensive insulin therapy, and intermittent CGM use in the hospital setting. Together, these opportunities add up to tens of millions of potential users in the U.S. alone. 
  • Dexcom has struck up numerous partnerships with other diabetes companies like Tandem Diabetes Care, Insulet, Eli Lilly, and Novo Nordisk to help get the word out. 
  • The company has teamed up with Alphabet's healthcare division, Verily, to develop a next-generation sensor, which aims to be smaller, cheaper, and fully disposable. 

Management forecasts that the company will pull in between $2 billion and $2.5 billion in total revenue by 2023 and improve profitability significantly. If those numbers prove to be anywhere close to accurate, shareholders should be nicely rewarded.

Reasons for caution

Dexcom would be a no-brainer investment if the company had the CGM market all to itself. Unfortunately, it faces a fair amount of competition. 

Its primary competitor is medical device giant Medtronic (MDT 1.82%), which has enjoyed a strong foothold in the diabetes market for decades, through its insulin pump division. It also launched a combination insulin pump/CGM system a few years ago, a device thath increased patient convenience and has proven quite popular with patients.

Another heavy hitter in the CGM space is Abbott Labs (ABT 2.20%), which won FDA approval for a CGM device called the Freestyle Libre in 2017. The Libre was the first CGM system that did not require its users to perform daily finger sticks for calibration, and was also marketed at a much lower price point than DexCom's CGM. The Freestyle Libre has experienced a lot of market success

Thus far, DexCom hasn't had any problems growing even with the competition from these well-funded giants, but it's possible that could change.

Another potential pitfall that could work against investors who buy today is Dexcom's generous valuation. The company is currently trading for more than 12 times sales and about 150 times next year's earnings estimates. Those figures suggest that Wall Street is pricing in a lot of growth. If it fails to deliver on its ambitious growth targets, shareholders could be in a for a world of hurt.

Is DexCom a buy?

While DexCom isn't an appropriate stock for risk-averse investors, I still think there is a lot like about the company. Its product is innovative, and the company has secured numerous partnership agreements, which should ensure it continues to win more than its fair share of the new business. What's more, the diabetes market is so huge that it could easily support multiple winners.

If you're a growth-focused investor who doesn't mind paying up for a high-growth business, DexCom could be a nice addition to your portfolio. 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Brian Feroldi owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of Medtronic. The Motley Fool recommends Insulet and Novo Nordisk. The Motley Fool has a disclosure policy.

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