DexCom Stock: A Buying Opportunity Amid Fears

DexCom stock has recently experienced a significant decline due to concerns surrounding the impact of weight loss drugs like Ozempic on the demand for its glucose monitoring devices for diabetics. However, this decline presents a buying opportunity as the market may have overreacted.

The Threat of Ozempic

Ozempic, a weekly injection that reduces appetite and aids in weight loss, has become a cause for concern among investors. Originally designed to treat diabetes, this drug's effectiveness in curbing overeating, a major cause of diabetes, has raised fears that individuals may no longer need DexCom's continuous glucose monitoring devices (CGMs). As a result, DexCom stock has seen a significant drop of 43% over the past three months.

Valid Concerns

Unfounded Fears?

Despite these concerns, Dexcom's second-quarter revenue demonstrated a healthy growth rate of 25% year over year, reaching $871 million—consistent with its five-year average. This suggests that current sales have not been affected. However, the fear remains that sales may decline in the future. But what if these fears are unfounded?

Complementary Solutions

Analysis and consultation with a diabetes and obesity specialist by BTIG analysts indicate that CGMs should still play a crucial role alongside GLP-1s (such as Ozempic) for patients. Monitoring devices can be essential in managing diabetes, and GLP-1s may actually complement CGMs. With this perspective in mind, BTIG analyst Marie Thibault, who has a Buy rating and a $125 price target, believes that GLP-1s could even provide a tailwind for CGMs. This potential outcome suggests a significant 62% upside from the stock's current level of $77.

Conclusion

While concerns surrounding Ozempic's impact on DexCom's business are valid, there is also reason to be optimistic. The market may have exaggerated these concerns, creating a buying opportunity for investors. By considering the potential complementary nature of GLP-1s and CGMs, it becomes clear that DexCom's monitoring devices could continue to thrive alongside weight loss drugs.

CGM Growth: A Long-Term Outlook

The global prevalence of diabetes remains a pressing concern, with approximately 537 million adults affected by the disease in 2021, as reported by the IDF Diabetes Atlas. Experts project this number to grow annually by around 1.5%, reaching a staggering 783 million individuals by 2045. However, the emergence of GLP-1s may potentially slow down or even diminish this growth. Despite this possibility, both Dexcom and Abbott Laboratories (ABT), its main competitor, currently cater to only millions of CGM users, indicating ample room for expansion in the market.

Considering these factors, it is highly likely that CGM manufacturers will experience sustained profitability. Analysts anticipate Dexcom to maintain an impressive annual sales growth rate of approximately 20% until 2027, projecting total revenue to soar to $6.8 billion. Although research and development expenses will need to align with this growth trajectory, previous years' increases in product costs and salaries are expected to stabilize. As a result, the company's profit margins can expand, leading to a nearly 25% annual increase in earnings per share, reaching an estimated $2.97 by 2027.

Consequently, Dexcom's stock now appears far more appealing than it did prior to the July decline. While the shares are not exactly cheap—trading at about 51 times the 12-month forward earnings estimates—they have notably dropped from their previous valuation of over 100 times earnings in late July. It is worth noting, however, that Dexcom has historically commanded a premium multiple due to market confidence in its sustained growth potential.

Thibault, an industry expert, asserts, "I do feel confident in the EPS growth, so the valuation is reasonable, and we do see a very large total available market."

Despite potential risks associated with the introduction of new weight loss drugs, these concerns have already been factored into Dexcom's stock valuation.