There's good news and bad news for DexCom (DXCM 1.57%) shareholders so far this year. The good news is that the stock has soared nearly 30% in recent weeks. What's the bad news? DexCom's share price is still down more than 20% year to date.
Some investors believe that DexCom's momentum can continue. Others think the maker of continuous glucose monitoring (CGM) systems is a much riskier proposition. Here are the bull and bear cases for DexCom stock.
Bull case: A lot of room to run
Keith Speights: I think the bull argument for DexCom is simple: The company continues to grow robustly and has a lot of room to run. The first part of the argument is easily supported, with DexCom on track to increase its revenue by close to 19% in 2022. As for the second component, there are several reasons to be optimistic about the company's growth prospects.
The number of adults with diabetes is increasing worldwide and could jump by more than 45% by 2045. Intermittent monitoring of glucose levels isn't enough for many of these individuals. DexCom's CGM devices provide a much-needed solution.
There's an especially big opportunity in monitoring patients with non-intensive type 2 diabetes. DexCom estimates that this U.S. market is seven times larger than its current total addressable market for patients requiring intensive insulin therapy.
Diabetes isn't just a problem in the United States. DexCom expects to more than triple its total addressable market by late 2023 through expansion into new geographic markets.
The biggest knock against the healthcare stock is its valuation. But with its massive growth runway, I think the bull case for DexCom is solid.
Bear case: a bloated valuation
George Budwell: DexCom's core business is firing on all cylinders right now. Let's be up front about that. The company is on track to post annual top-line growth in excess of 18% in 2022, and its CGM devices sport a ginormous non-GAAP gross profit margin of around 64%. The ongoing launch of DexCom's next-generation G7 CGM system is also expected to drive sales higher by a noteworthy 20% next year. Lastly, DexCom exited the most recent quarter with a whopping $2.37 billion in cash, cash equivalents, and marketable securities. This large-cap medical device titan is thus on solid financial ground.
What's the catch? DexCom's shares might be wildly overvalued right now. Thanks to its blistering revenue growth over the past few years, DexCom's stock is now trading at approximately 11.5 times next year's projected sales. While most publicly traded medical device companies do sport hefty premiums, DexCom's valuation has arguably gotten a little out of hand at this point. For context, the average forward-looking price-to-sales ratio across the company's immediate peer group currently stands at around 5.5. DexCom's stock is therefore being valued at more than twice the industry average on this particular metric.
Does DexCom deserve an elite valuation? There's no denying that DexCom's CGM franchise could have a lot more room to run from an annualized sales standpoint. Diabetes is a worldwide epidemic, and incidence rates are still on the upswing across the globe. In fact, DexCom's sales may even accelerate in the years to come because of rising incidence rates and the overwhelmingly positive view of CGM devices by healthcare providers and patients alike.
That being said, DexCom is far from alone in the CGM market. The company competes against a slew of well-financed healthcare giants, such as Abbott Laboratories and Medtronic. These top-shelf competitors may eventually cut into DexCom's market share through the advent of more user-friendly devices or ones that integrate better into next-generation diabetes care ecosystems. As a result, investors may want to tread carefully with this high-priced medical device stock.
Pick your animal
Investors must decide for themselves whether they're bullish or bearish about DexCom. There are good arguments on both sides. The decision could come down to your personal investing style. If you're growth-oriented with a high tolerance for risk, DexCom could be a good fit. If you're more risk-averse or seeking attractive valuations, there are better alternatives.
