Attractive investment opportunities can sometimes arise when investors react emotionally to short-term events. Some of these events revolve around the earnings season, when a company releases financial results that fall short of analysts' expectations. It can be a miss involving just a penny or two, but the stock will still get sold down savagely. Such was the case for DexCom (DXCM -0.41%), a manufacturer of continuous glucose monitors (CGMs) for diabetics. The healthcare company's stock plunged by 41% in a single day on July 26 when the company released its 2024 second-quarter earnings.
But here's the thing. Such short-term share price fluctuations should not detract you from the long-term objective of growing your wealth. If a business enjoys solid long-term prospects, then a sharp plunge in its share price represents the perfect opportunity to accumulate a growth stock on the cheap. Let's find out why this is the case for DexCom and why it's a stock worth considering for your investment portfolio.
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Missing expectations and revising its guidance downwards
First, let's look at why DexCom's stock plunged on that fateful day. The company announced sales of $1 billion for Q2 2024 but fell short of analysts' expectations for revenue of $1.04 billion. However, the bigger problem was not the slight revenue miss, but how management reduced its sales guidance for 2024. The CGM company now expects revenue to come in between $4 billion to $4.05 billion for the full year, down around $200 million to $300 million from its previous forecast of between $4.2 billion to $4.35 billion.
CEO Kevin Sayer attributed the reduced guidance to a weaker sales effort as the company aims to sell its CGM product along with an over-the-counter wearable device known as Stelo. Another headwind came in the form of rebates for its new G7 CGM, which ended up being three times faster than management had anticipated. These two events led to the company garnering not just fewer customers, but also less spending per customer. However, the good news is the drag on revenue from the quicker rebates should peak in the current quarter and then trail off.
A strong track record of financial growth
Investors should scrutinize DexCom's financial track record to determine if the problems stated above could threaten to overwhelm the business, or if they are just temporary issues that should resolve over time. Over the past three years (from 2021 to 2023), the company saw its revenue rise steadily from $2.4 billion to $3.6 billion. Net income more than doubled over this period from $216.9 million to $541.5 million. Free cash flow generation has also improved by leaps and bounds, surging from $53.3 million in 2021 to $511.9 million by 2023.
DexCom's momentum has continued into the first half of this year as revenue rose 19.4% year over year to $1.9 billion. Operating profit jumped 47.8% year over year to $259.1 million, while net income surged by 76% year over year to $289.9 million. The company's free cash flow continued to climb for the half year, touching $366 million for a 72% year-over-year surge. While 2024's projected growth may have slowed from management's initial guidance, a sales force rejig should remedy the situation and help the company refocus its efforts on pushing sales for both its G7 CGM and Stelo.
A large and growing total addressable market
DexCom should continue enjoying the growing demand for its CGM solutions. Diabetes is a global scourge, with 537 million people between the ages of 20 to 79 being diagnosed with the chronic condition in 2021. IDF Atlas, an organization that tracks the prevalence of diabetes globally, projects that this number will rise to 783 million by 2045. Intermittent glucose monitoring is a thing of the past as CGM becomes the baseline standard of care for diabetes patients.
Apart from patients who are already on insulin treatment for their diabetes, DexCom is also looking at extending its growth in the U.S. to people who have diabetes but have not progressed to insulin therapy. There are more than 25 million people with such a profile, thereby significantly widening DexCom's total addressable market and opening opportunities to capture a slice of business from this industry. Not only is the diabetes market poised to grow more patients with this disease, but DexCom's CGM can also appeal to a wider group of patients in the future.
Valuations are undemanding
Investors who are concerned about valuations can study the chart below, which displays DexCom's five-year price-to-earnings (P/E) ratio.
DXCM PE Ratio data by YCharts.
Because of the sharp share price decline, the company now trades at its lowest price-to-earnings valuation over the past five years. Its prospects over the long term have not diminished, though, and DexCom's total addressable market may even expand beyond its current patient profile to include a wider circle that it can target. The company is a pioneer in enabling users to monitor their glucose levels on smart watches such as the Apple Watch and sending the information directly to their smartphones. DexCom's continued innovations in the arena of CGMs, its solid financial profile, and the strong demand for its solutions should help it continue growing its revenue and net income for the foreseeable future.
