What happened

Shares of Tandem Diabetes Care (NASDAQ:TNDM) slipped over 18% last month, according to data from S&P Global Market Intelligence. There wasn't any company-specific news, but a number of high-growth stocks lost ground in September as investors took some gains off the table for the overachievers. The insulin pump device and software developer was an easy target, considering it set an all-time high market valuation of over $4 billion in early September. 

Now valued at $3.3 billion, Tandem Diabetes Care remains relatively expensive. The stock trades at about 10 times expected revenue for this year and over 23 times book value. But the business is poised to reach an important milestone in the second half of 2019. 

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Image source: Getty Images.

So what

Tandem Diabetes Care has enjoyed swift growth since launching its t:slim X2 insulin pump with the Basal-IQ algorithm in the third quarter of 2018. Management expects full-year 2019 revenue of at least $350 million, compared with sales of $184 million last year. Perhaps most important is that the company is growing while improving operating margin.

The insulin pump developer reported an operating loss of just $1.8 million in the second quarter of 2019, compared to an operating loss of $44.6 million in all of 2018. Given the pace of revenue growth and gross margin of over 52%, Tandem Diabetes Care should easily deliver its first-ever profitable quarter in the second half of 2019. It's an important milestone.

For one, profitable growth can make a premium valuation easier to digest for investors. There won't be many stocks capable of delivering the same combination of revenue growth and profitability. For another, Tandem Diabetes Care will soon be generating cash from operations -- it burned just $556,000 from operations in the first six months of 2019 -- which can help the company to self-fund growth and invest in research and development.

Now what

There are an estimated 1.6 million Americans living with type 1 diabetes who would benefit from pump therapy. When Tandem Diabetes Care launched its current t:slim X2 insulin pumps, only about 28% of eligible patients used an insulin pump. The company thinks it can get that market penetration rate up to 50% -- and command a dominating market share in the process. Simply put, the business appears to be executing on its vision and has a clear-cut path to growth. One bad month on the stock market doesn't change that.

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.