Last week was a tough one for Dexcom (DXCM 0.49%) shareholders. The maker of continuous blood glucose monitors lowered its forward revenue outlook when it reported second-quarter results on Friday, July 26.
If there's one thing markets hate, it's uncertainty. Investors responding to management's shifting expectations hammered the stock 40.6% lower in a single trading session. That beat the stock down to a price we haven't seen since early 2020.
NASDAQ: DXCM
Key Data Points
Was the forward-looking adjustment management made awful enough to warrant such a severe beating? Here's a closer look at why the bottom fell out from under Dexcom stock to see if it could be a bad-news buy.
Why Dexcom stock was beaten down severely
Dexcom launched its next-generation continuous blood glucose monitor (CGM) last February. This April, management told investors it expected total revenue would rise 17% to 21% this year to a range between $4.20 billion and $4.35 billion.
The stock was hammered mercilessly because, on July 26, management lowered its 2024 revenue outlook to a range between $4.00 billion and $4.05 billion. The new range is between 11% and 13% more than the company reported last year.
Investors are extra nervous because Dexcom cited unexpected near-term issues that arose in the second quarter and continue to pressure sales growth. Management said it expects third-quarter sales to rise by just 1% to 3% year over year.
Why rapid sales growth could return
Dexcom cited the ongoing realignment of its recently expanded U.S. sales force as the lead reason for recently disappointing sales growth. Also, the recent launch of its next-generation device, called G7, has led to more rebates than the company had anticipated.
Lowered revenue guidance is troubling, but at least it's down because G7 rebates are facilitating new customer starts. The G7 sensor is an improvement but patients still need to replace it every 10 days. According to the Centers for Disease Control, more than 35 million Americans have type 2 diabetes, and many physicians would argue that all of them could benefit from constant blood glucose monitoring.
Each patient with a Dexcom G7 generates hundreds of dollars in revenue per month. This year, management expects more than $4 billion in revenue, but this represents just a tiny sliver of its addressable market.
Management also expects rebate-related sales pressure to subside soon, which suggests a return to rapid growth in 2025.
Reasons to remain cautious about Dexcom
Unfortunately for its investors, Dexcom isn't operating in a vacuum. It competes fiercely with Abbott Laboratories (ABT 3.14%) and its Freestyle Libre devices.
Abbott launched the latest generation of Freestyle Libre in the U.S. in 2022, about 10 months ahead of Dexcom's G7 launch. Abbott's device is smaller than the G7, and it lasts 40% longer before the manufacturer recommends replacing it.
Abbott is an especially fierce competitor because, as a conglomerate with several growth drivers, it can afford to price the FreeStyle Libre 3 competitively. There are a lot of ins and outs when it comes to insurance co-pays, but folks paying cash for their CGM sensors from Costco can save more than $500 annually by using Freestyle Libre 3 instead of Dexcom's G7 device.
A buy now?
Dexcom reported total second-quarter U.S. sales growth that decelerated slightly to 19% year over year. Abbott reported U.S. sales of diabetes care devices that rose by 26% over the same time frame.
In the vital U.S. market, it looks like Abbott is taking a strong lead. Dexcom might be able to reassert itself once its U.S. salesforce restructuring process is complete, but there are no guarantees.
The stock has been beaten down a long way and has been trading for about 37.8 times forward-looking earnings expectations. This is a very reasonable valuation for a company growing at Dexcom's recently reduced pace or extremely low if we assume the company can return to its previous growth rate.
Risk-averse investors want to wait another quarter or two to make sure Dexcom's recent growth deceleration doesn't worsen. For most growth-oriented investors, though, buying this stock on the dip looks like a smart move.
