Shares of the medical device maker DexCom (DXCM 0.09%) shot about 50% higher in October. Unfortunately, the stock is still around 25% below the peak it reached in late 2021. 

Investors who have seen DexCom soar in the past only to come crashing down are justifiably nervous about adding the stock to their own portfolios. Let's look below the surface to see if it has any more fuel in the tank.

Why DexCom soared in October

On Oct. 28, DexCom stock jumped in response to a third-quarter earnings report that beat expectations on the top and bottom lines. Analysts expected adjusted earnings of $0.24 per share and were pleasantly surprised when the company reported a profit of $0.28 per share.

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DexCom specializes in constant blood-glucose monitors (CGMs) for diabetic patients. Earlier this year, the company began offering an older device called DexCom One at a lower cost in price-sensitive regions, and the strategy is working. International sales jumped 22% year over year, or 28% if you adjust for the strengthening U.S. dollar.

Reasons to buy DexCom now

Roughly 1 in 10 Americans are living with diabetes. Keeping blood sugar concentrations in an ideal range helps keep them out of the hospital and saves healthcare systems heaps in the process.

Despite discounting some older products, DexCom's overall business is getting more profitable. Third-quarter adjusted earnings came in at 20.9% of total revenue, which was 1.9% better than the previous year's period.

Investors can reasonably expect DexCom to become significantly more profitable over the next several quarters. In early October, the company launched its next-generation CGM called DexCom G7 in the United Kingdom, Germany, and other important markets around the world.

DexCom sent its application for clearance of the G7 device to U.S. regulators in late 2021, but some last-minute changes to the associated smartphone application have held up the process. DexCom has already responded to the FDA's concerns and expects G7 clearance in the important U.S. market by the end of the year.

Top reasons to remain cautious

DexCom isn't the only company marketing CGMs to diabetic patients. Its biggest rival, Abbott Laboratories (ABT 0.52%), received FDA clearance for its next-generation CGM, FreeStyle Libre 3, in May.

A long lead isn't the only reason DexCom could have a hard time competing with the much larger company's device. Abbott's inconspicuous device is the size of two stacked pennies, and it doesn't need to be replaced for 14 days at a time. The G7 is significantly larger and needs to be replaced every 10 days.

The diabetic patient population is probably big enough to drive strong demand for both Abbott's and DexCom's devices. That said, expectations for the G7 are extremely high. At recent prices, the stock costs more than 150 times the company's forward-looking earnings forecast. This means anything less than an ultra-successful launch could lead to heavy losses for investors who buy the stock at its present valuation.

A buy now?

Smaller size and a longer life span could be significant advantages for Abbott's CGM. With an arguably inferior product, growing into its ultra-high valuation won't be easy for DexCom. It's probably best to watch this stock from a safe distance -- at least until we see how well the G7 launch progresses.