The drop is directly traceable to a bearish report that was released today by an analyst named Ben Axler, at a hedge fund named Spruce Point Capital Management. Axler published a report stating that DexCom's stock could be cut in half from today's levels.
Here are the key points of his argument:
- DexCom is starting to saturate its core type-1 diabetes market in the U.S.
- It recently stopped reporting patient growth, which is a bad sign.
- Abbott Laboratories (ABT 0.01%) is on the verge of launching its second-generation FreeStyle Libre product. This updated device promises to be much more competitive with DexCom and will cost about 80% less.
- The incoming competition could crimp DexCom's revenue growth rate and margins.
Traders are selling off DexCom's stock in response.
Check out the latest earnings call transcript for DexCom.
Bearish analyst reports should always be viewed with skepticism when the author is short the security prior to publication. That's certainly true of this report as Axler and/or Spruce Point Capital Management are currently short shares of DexCom.
That doesn't mean that this report should be dismissed, as it does raise some valid points. Abbott is a huge medical device company with vast resources, and its new FreeStyle Libre looks quite compelling. It could be a serious contender considering that it will be priced at a substantial discount to DexCom's products. That premium might not matter much to patients who are on intensive insulin therapy and demand the very best, but it will likely be a huge selling point for patients who require less-intensive forms of therapy and are price sensitive.
On the flip side, DexCom hasn't slowed down at all since the FreeStyle Libre was launched a few years ago, so it is possible that the updated version won't impact its growth rates, either. It is also worth noting that DexCom management is on record stating that it will pull in between $2 billion and $2.5 billion in total revenue by 2023. They knew that the next-generation FreeStyle Libre was waiting in the wings when they made that forecast, so they didn't think it will hamper their growth.
My view is that total diabetes pie is big enough to support multiple winners, so I don't think DexCom's bulls need to panic. But there's no doubt that the competition in the space is heating up.