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Will Tandem Diabetes Care Keep Its Premium Valuation in 2020?

By Maxx Chatsko - Feb 29, 2020 at 7:30AM

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The insulin pump manufacturer turned in a solid year of progress in 2019, but full-year 2020 guidance might be at odds with initial Wall Street expectations.

Tandem Diabetes Care (TNDM -2.56%) owned less than 5% of the insulin pump market in the U.S. five years ago. The market has grown 40% since then, but the company now has 20% market share. It's not an overnight success, but it's close. 

Wall Street hasn't hesitated to reward the company's progress. Revenue increased 237% from 2017 to 2019, which has propelled the growth stock 3,000% in that three-year span. Tandem Diabetes Care now trades a market cap of $4.5 billion. 

While the business delivered its best year ever in 2019 and healthy revenue growth is expected in 2020, investors might need to prepare for volatility as Wall Street shifts its focus to the bottom line.

A wooden box filled with cards showing question marks.

Image source: Getty Images.

By the numbers

Tandem Diabetes Care develops insulin pumps for individuals with type 1 diabetes and type 2 diabetes, although the former comprises 90% of customers. 

The company's flagship product is the t:slim X2 insulin pump, which launched in late 2016 and has amassed market share since. Technically, the complete product offering is a regulator-approved combination of hardware and software. Patients appreciate the ease of use provided by a large touchscreen, Bluetooth compatibility, the relatively small size and low weight of the pump, and the ability to receive over-the-air updates. Meanwhile, Tandem Diabetes Care has developed two algorithms, Basal-IQ and Control-IQ, to make the devices even easier to use. 

A focus on being user-friendly has also been very shareholder-friendly. Tandem Diabetes turned in its best year of operations ever in 2019, as the growth rate accelerated from previous years. 

Metric

2019

2018

Change (YoY)

Revenue

$362.3 million

$183.9 million

97%

Gross profit

$194.2 million

$89.8 million

116%

Operating expenses

$210.9 million

$134.4 million

57%

Operating income

($16.7 million)

($44.6 million)

N/A

Data source: Press release. YoY = year over year.

While the company expects to continue investing in scaling up its technology platform in 2020, management also expects the rate of revenue growth to slow. Tandem Diabetes Care issued the following full-year 2020 guidance:

Metric

Full-Year 2020, Expected

Full-Year 2019, Actual

Change (YoY)

Revenue

$450 million to $465 million

$362 million

24% to 28%

Gross margin

54%

54%

No change

Adjusted EBITDA as % of revenue

12% to 14%

13%

No change at midpoint

Data source: Press release. YoY = year over year.

Achieving year-over-year revenue growth of 24% may not look as impressive as nearly doubling last year, but it's still pretty impressive considering the scale of t:slim X2 sales. It's also worth pointing out that Tandem Diabetes Care has routinely underestimated growth with guidance in past quarters. 

Nonetheless, shareholders could experience volatility if progress doesn't match up with Wall Street expectations. Analysts expect revenue of about $459 million and earnings per share (EPS) of $0.02 in 2020, according to numbers compiled by Yahoo. That level of revenue is closer to the top end of the company's range, but not unreasonable. The issue might come down to earnings. 

Tandem Diabetes Care posted a loss of $0.42 per share in 2019. How much can it improve the bottom line while investing in the future? Based on initial guidance, the company expects to deliver gross profit of $243 million to $251 million in 2020. That means operating expenses would have to grow by about 10% to 15% from 2019 for the business to have a shot at meeting Wall Street expectations for EPS. That expectation might be incompatible with investments in growth. That might explain why shares dipped when full-year 2019 earnings and full-year 2020 guidance were first reported.

A solid growth stock that might encounter some turbulence

Considering shares of Tandem Diabetes Care trade at about 10 times expected 2020 sales and 23 times book value, the tussle between management's expectations and those of Wall Street could force analysts to be a little more critical of the stock's premium valuation. That's not something investors with a long-term mindset should be too concerned about, but shareholders should be prepared for the stock to encounter its first real volatility in several years. 

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Tandem Diabetes Care Stock Quote
Tandem Diabetes Care
TNDM
$71.96 (-2.56%) $-1.89

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