Healthcare stock DexCom (DXCM 2.89%) has a track record of tremendous business growth and share price appreciation that has remained consistent and robust during the pandemic. In fact, shares are up 50% over the trailing 12 months.
In this segment of Backstage Pass, recorded on Dec. 1, Fool contributors Rachel Warren and Brian Feroldi discuss the stock's recent earnings, its high valuation, and its long-term growth prospects.
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Rachel Warren: This is another company I talk about fairly frequently and it's a healthcare stock I really like. For anyone who's not familiar, DexCom develops and manufactures continuous glucose monitoring systems used by type 1 and type 2 diabetics around the world. DexCom's customer base includes both individual patients as well as providers. The company remains one of the top players in the multi-billion-dollar CGM market even though it has faced increased competition in recent years.
The current model that it sells is its G6 continuous glucose monitoring device. This features a sensor with a 10-day wear time that users insert beneath the skin with a one-touch applicator. It only releases one generation of its system at a time. The next one the G7 is expected to be launched as soon as this quarter.
Shares of DexCom. This has been a high-flying stock. It's gained about 780% over the trailing-five-year period, more than 50% over the past six months alone. This is a stock that I think a lot of investors including myself are very excited about. Just a quick highlight of the third-quarter performance revenue was up 30% year over year for a total of $650 million, U.S. revenue growth was up 23% year over year while its international revenue in the third quarter were up 57% year over year. Its gross profits on a GAAP basis totaled almost 69% of its revenue for the third-quarter.
Net income was down slightly although operating income grew to $118 million compared to $94 million in the third-quarter of last year. The company has a really strong cash position. It closed the most recent quarter with about $2.7 billion in cash, cash equivalents, and marketable securities compared to $735 million in total current liabilities. This is a great company with a really strong growth trajectory in a very lucrative industry. I think its next-generation CGM system, which is about to release is also going to be very key for it to remain competitive.
One of the company's top competitors at Abbott with its FreeStyle Libre, which notably has a longer wear time. Wear time translates to expense for the consumer. So that also translates to more customers, or less customers for Dexcom so I'm very excited to see where this company is headed in the next few years.
Brian Feroldi: Brian just mentioned selling Apple in 2010. I sold DexCom in 2006 for about $7 per share. It's currently $560 so oops. [laughs] But DexCom has done really well. It's been one of the best-performing stocks in the market over the last 10 plus years. Today, this stock trades at 151 times forward earnings. In your opinion, is the price-to-earnings ratio a good metric to look at to judge this company's value?
Warren: I think it's a great metric to look at. I don't think it tells the entire story for this company. I think DexCom is one of those healthcare stocks that's had an astronomical track record of share price growth.
It trades at a very high valuation. There's definitely no doubt about that, particularly for a healthcare stock. I think this comes down to a few things. I think there's a lot of robust investor sentiment around the stock and I think the fact that this is a company that essentially dominates the space that it's in. This is a company that grew its revenue 43% in 2019, 31% in 2020.
It operates in an industry and leads an industry that generates consistent demand and has plenty of untapped growth potential left. There was a study done in 2020 by a company called Bigfoot Biomedical and it reported that only one in four potential CGM users actually use this device, which means that DexCom has a lot of runway left to tap into users it hasn't yet reached, potential customers within the CGM industry. I think if you weigh all of these factors as well as DexCom's leadership in this industry, it's P/E ratio makes more sense. It's high, but to me it's worth it for this company.
Brian Feroldi: OK. Thank you.
