Medical device specialist DexCom (DXCM -2.89%) has been on fire over the past year, significantly outperforming the broader market. The healthcare company can thank several tailwinds for its performance, including the continued adoption of the technology it has helped pioneer -- continuous glucose monitoring (CGM) -- and the launch of new products.

But DexCom still has some upside left, at least if we go by Wall Street's predictions. The company's current average price target of $132.22 (according to Yahoo! Finance) represents a 19% upside over its stock price of about $111 as of this writing. Should investors follow the Street's advice and buy DexCom's shares? Let's dig in and find out. 

The advantage of continuous glucose monitoring

CGM devices give diabetes patients a much better option to keep track of their blood sugar levels. Typically, those with diabetes have to draw blood with a device sometimes called a glucometer that measures the amount of sugar in the blood sample. But this method is painful and suffers from one other major drawback: It only tells patients their blood glucose levels at a specific point when they measure it. Enter CGM options, like DexCom's G6. 

The G6 system has a small sensor inserted under the skin that measures blood glucose levels once every five minutes. That's 12 times per hour and 288 times per day. Having access to this much data can allow patients to better navigate the day-to-day challenges of living with diabetes. The G6 also sends alerts to compatible devices if blood glucose levels go above or below a predetermined threshold. 

This option is superior. And it has helped DexCom make serious headway in the diabetes market. The company currently serves an estimated 1.7 million patients worldwide, and its G6 is the most popular CGM system in the world. Further DexCom's revenue has grown. Last year, the company's top line jumped by 19% year over year to $2.91 billion.

But there is plenty of upside left. There are 37.3 million diabetes patients in the U.S. alone. According to the World Health Organization, there are 422 million of them globally. DexCom's installed base of 1.7 million is just a minuscule portion of that. The company does have several competitors, but it leads this market with Abbott Laboratories, whose CGM devices franchise, the FreeStyle Libre, generated $4.3 billion in revenue in 2022.

DexCom has been able to continue to increase its revenue and its installed base despite the competition from the much larger Abbott Laboratories. 

Even if there is a combined 20 million CGM users worldwide (an unlikely number), there is still massive room to grow globally. And that's before we add the fact that the population of patients with diabetes will maintain an upward trajectory for decades. Meanwhile, DexCom has released the G7, an updated CGM system whose sensor is smaller than that of the G6.

It started launching it in Europe last year and should do so in the U.S. this year. The DexCom ONE is another device that focuses on simplicity and accessibility (in terms of price). These newer devices will help DexCom as it continues to gain new users. 

A solid buy despite the risks 

All companies face risks. DexCom is no exception to this iron rule. Let's consider two potential headwinds for investors to consider before initiating a position in this healthcare company; the first is valuation. DexCom's shares look richly valued, with a forward price-to-earnings ratio of 106. That looks high by almost any standard. By comparison, the S&P 500's forward P/E is just 20. DexCom's valuation is likely a reflection of the company's prospects and the fact that it has historically grown its revenue very rapidly.

In the past five years, DexCom's top line has increased by an average of 42.5% per year. Companies with impressive revenue growth and attractive opportunities often command much higher premiums. However, DexCom could be vulnerable to heightened volatility in the short term, especially if it fails to live up to investors' expectations which are, to some extent, already baked into its stock price. 

Another problem for DexCom could be increased competition from Apple, which has been developing non-invasive ways to measure patients' blood glucose levels. It could eventually integrate this feature into some of its devices like the Apple Watch. According to recent reports, Apple has reached the proof-of-concept phase of its work in this area. What should investors think of these potential problems for DexCom? 

Let's start with the second. It's important to note that the proof-of-concept stage is a fancy way of saying, there is real promise here, but there is still a long way to go. It could be five years or more before this technology sees the light of day if it does at all. And while valuation is an issue, DexCom could justify its rich premium over the long run, given the massive opportunity ahead in the diabetes market. Will the healthcare company meet the Street's predictions in the next year?

My view is that it will. But even if it doesn't, DexCom still looks like an excellent long-term bet.