DexCom (NASDAQ:DXCM) ranks as one of the hottest healthcare stocks on the market. Its shares are up over 40% year to date and have nearly quadrupled over the last five years. Despite fears that a recession could be on the way and worries about escalating trade tensions between the U.S. and China, DexCom stock is at an all-time high.

Some investors might worry that gravity could kick in for this high-flying stock. But is DexCom still a smart stock to buy?

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The case for buying DexCom

Probably the strongest argument for buying shares of DexCom is that the company's growth is still only in its early stages. DexCom's G6 continuous glucose monitoring (CGM) system has been a huge winner so far. Its momentum isn't slowing down, with the G6 CGM driving year-over-year sales growth of 39% in the second quarter of 2019.

DexCom plans to launch the G6 in Canada and make the system available to U.S. Medicare patients later this year. The company is on track to double its manufacturing capacity for the G6 by the end of 2019 in anticipation of higher demand.

The realities of the current state of diabetes treatment and management are stacked in DexCom's favor. Of the estimated 415 million people across the world with diabetes, only around 12.5% consistently achieve their target glucose levels. Most individuals with diabetes have glucose levels outside of desired thresholds roughly 70% of the time.

Real-time CGM provides a solution to this issue. And DexCom's G6 currently reigns as the most powerful CGM on the market. It's the only CGM that meets all of the special controls established by the U.S. Food and Drug Administration (FDA) for fully interoperable continuous glucose monitoring (iCGM) systems. 

DexCom expects to launch a new CGM, the G7, by late 2020 or early 2021. This system will be even smaller and more cost-effective than the G6 and have longer sensor wear. DexCom thinks that the G7 will accelerate its expansion into adjacent markets beyond its core intensive insulin focus.

There are around 3.2 million patients in the U.S. that are included in DexCom's core market. The company currently claims a little under 20% of this market. DexCom is especially targeting the gestational diabetes opportunity and the intermittent monitoring of diabetes in hospital patients, which represent another 4 million and 14 million patients, respectively.

A few wrinkles

One knock against DexCom is that its share price already reflects expectations of significant growth. Shares currently trade at 123 times expected earnings. The consensus Wall Street one-year price target for the stock is less than 3% above DexCom's current share price.

Achieving the lofty growth projections isn't a slam dunk, either. DexCom isn't the only player in the CGM market. Abbott Labs' (NYSE:ABT) lower-cost FreeStyle Libre has taken the market by storm as well, with sales growing even faster than the G6.

Abbott awaits FDA clearance to market a new version of its CGM that meets all iCGM standards. Abbott CEO Miles White stated in the company's Q2 conference call that he expects the new Libre device will achieve annual sales of at least $5 billion. DexCom's competition could soon intensify, and it's going up against a much bigger rival with Abbott.

It's also possible that DexCom will find its expansion into adjacent markets is more challenging than anticipated. At this point, the company is only exploring how it can move into some of these new markets.

To buy or not to buy?

The decision about buying DexCom right now boils down to whether or not the company can keep its phenomenal growth rate going. I think it can.

I referred to Wall Street's one-year price target for DexCom earlier, but there's another estimate that I didn't mention. Analysts expect the company will generate average annual earnings growth of 140% over the next five years. That puts DexCom's seemingly sky-high valuation in a different light.

What about the stiffer competition from Abbott Labs? My view is that the market is big enough to support both DexCom and Abbott. DexCom should be able to compete much more effectively against FreeStyle Libre with the G7 because of the lower manufacturing cost for the new system. I don't expect the G7 to beat Libre on price, but a lower cost will help tremendously.

As for expanding into adjacent markets, I won't be surprised if it takes longer than many hope it will. However, my take is that CGM offers significant benefits in managing gestational diabetes, in hospital intermittent glucose monitoring, and for patients with type 2 diabetes who aren't intensive insulin users.

I believe that the future continues to look very bright for DexCom. There could be some bumps in the road along the way, but I think this stock is a good pick for investors with a long-term perspective.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.