Appealing investment prospects may present themselves when investors respond emotionally to immediate occurrences. This often occurs during the earnings season, when a company discloses financial performance that does not meet analysts’ predictions. Even a small deviation, such as missing earnings by a cent or two, can lead to a significant drop in the stock price. This was the situation for DexCom ( DXCM 3.30% ) A company that produces continuous glucose monitors (CGMs) for individuals with diabetes saw a sharp drop of 41% in its stock value on July 26 after announcing its second-quarter earnings for 2024.
However, it is important to note that temporary changes in stock prices should not distract you from the overall goal of increasing your wealth in the long run. If a company has strong long-term potential, a sudden drop in its stock price can actually be a great chance to buy more shares. growth stock At a low cost. Let’s explore the reasons behind this for DexCom and why it’s a stock that you should think about adding to your investment portfolio.
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Failing to meet expectations and lowering its projected guidance.
To begin with, let’s examine the reasons behind DexCom’s significant drop in stock value on that particular day. The company reported second-quarter sales of $1 billion in 2024, which was below the anticipated revenue of $1.04 billion by analysts. However, the main concern was not the minor revenue shortfall, but rather the decision by management to lower its sales projection for the entire year 2024. DexCom now predicts that its revenue for the year will fall within the range of $4 billion to $4.05 billion, a decrease of approximately $200 million to $300 million from its initial estimate of $4.2 billion to $4.35 billion.
The CEO, Kevin Sayer, stated that the company’s lowered forecast was due to a decrease in sales activity as they work on selling their CGM product in combination with the Stelo wearable device. Additionally, unexpected rebates for the new G7 CGM, which were three times higher than expected, also impacted the company’s performance. As a result, the company saw a reduction in both customer numbers and spending per customer. Fortunately, the impact of the increased rebates on revenue is expected to reach its highest point in the current quarter before decreasing.
Demonstrated history of consistent financial improvement
Investors need to carefully examine DexCom’s financial performance to assess whether the challenges mentioned earlier pose a significant threat to the company’s operations or if they are temporary issues that may be resolved in due course. In the last three years (spanning from 2021 to 2023), DexCom witnessed a consistent increase in revenue, climbing from $2.4 billion to $3.6 billion. Similarly, the company’s net income more than doubled during this period, jumping from $216.9 million to $541.5 million. Furthermore, the company’s free cash flow generation experienced significant growth, soaring from $53.3 million in 2021 to $511.9 million by 2023.
DexCom has maintained its strong performance in the first half of the current year, with a 19.4% increase in revenue to $1.9 billion compared to the previous year. The operating profit also saw a significant rise of 47.8% to $259.1 million, and the net income surged by 76% to $289.9 million year over year. The company’s free cash flow continued to grow, reaching $366 million for a 72% increase compared to the previous year. While the projected growth for 2024 has slowed down from the initial guidance provided by management, a restructuring of the sales team is expected to address this issue and help DexCom focus on boosting sales of its G7 CGM and Stelo products.
A vast and expanding market opportunity
DexCom is poised to benefit from the increasing need for its Continuous Glucose Monitoring (CGM) products. Diabetes affects a large number of people worldwide, with 537 million individuals aged 20 to 79 diagnosed with the disease in 2021. According to IDF Atlas, an organization monitoring diabetes rates globally, this figure is expected to climb to 783 million by 2045. The traditional method of monitoring glucose levels intermittently is becoming outdated as CGM technology is becoming the essential standard of care for individuals with diabetes.
In addition to individuals with diabetes who are currently using insulin as part of their treatment, DexCom is exploring opportunities to expand its market in the United States to include those with diabetes who have not yet advanced to insulin therapy. This group consists of over 25 million people, which greatly increases DexCom’s potential market size and allows the company to target a portion of this sector. With the diabetes market expected to grow and accommodate more patients, DexCom’s Continuous Glucose Monitoring (CGM) system is positioned to attract a broader range of patients in the future.
Valuations are reasonable.
Investors who are worried about the value of investments can refer to the chart provided below, showing DexCom’s price-to-earnings ratio over the past five years. (P/E) ratio .
DXCM PE Ratio data by YCharts .
As a result of a significant drop in the stock price, the company is currently valued at its lowest price-to-earnings ratio in the last five years. Despite this, the company’s long-term outlook remains positive, and DexCom’s potential market size may grow beyond its existing customer base to include a larger demographic. DexCom is a trailblazer in developing technology that allows individuals to track their blood sugar levels using smartwatches. Apple DexCom’s advancements in continuous glucose monitors (CGMs), along with its strong financial position and high demand for its products, are expected to drive revenue and profit growth in the coming years. The company is able to send information directly to users’ smartphones.
