Will DexCom Stock Rebound To Its 2021 Highs Of $160?

DexCom stock (NASDAQ: DXCM) currently trades at $73 per share, around 55% below the highs of $163 seen in November 2021. In comparison, Insulet stock (NASDAQ: PODD) saw its stock decline 39% over the same period. DXCM stock was trading much higher at around $75 in early June 2022, just before the Fed started increasing rates, and is still close to that level, compared to 48% gains for the S&P 500 during this period. This underperformance of DXCM stock can be attributed to slowing sales growth, partly due to increased benefits of GLP-1 drugs that help patients control their diabetes and lose weight. The lowering of its full-year 2024 outlook last month also led to a significant fall in DexCom’s stock.

The decrease in DXCM stock has been far from consistent. Returns for the stock were 45% in 2021, -16% in 2022, and 10% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DXCM underperformed the S&P only in 2023. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DXCM face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, DXCM stock looks undervalued at levels of $73. The $99 average of analysts price estimate implies a 35% upside from the current levels. Our detailed analysis of DexCom’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 — early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% — the highest level in 40 years. The S&P 500 index declines more than 20% from peak levels.
• July–September 2022: Fed hikes interest rates aggressively — resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022–July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

DexCom And S&P500 Performance During 2007-08 Financial Crisis

DXCM stock saw a 61% decline from $3 in September 2007 (pre-crisis peak) to $1 in March 2009 (as the markets bottomed out). It recovered sharply post the 2008 crisis to levels of around $2 in early 2010, rising about 100% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

DexCom’s Fundamentals Over Recent Years

DexCom’s revenue rose 2x to $3.9 billion over the last twelve months, compared to $1.9 billion in 2020. New customer additions are leading the revenue growth for DexCom amid rising awareness of CGM devices. DexCom is among the few players with regulatory approvals for its wearable continuous glucose monitoring (CGM) device. Not only has the company seen stellar revenue growth, but it also saw its operating margin expand from 15.5% in 2020 to 17.3% now.

Does DexCom Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

DexCom’s total debt increased from $1.8 billion in 2020 to $2.6 billion now, while its cash increased from around $2.7 billion to $3.1 billion. The company also garnered $0.9 billion in cash flows from operations in the last twelve months. Given its solid cash cushion, the company is in an excellent position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe DXCM stock has the potential for gains once fears of a potential recession are allayed. That said, the concerns over the broader application of obesity drugs and its impact on DexCom remain a key risk factor for realizing these gains. Returning to the pre-inflation shock level means that DXCM stock will have to gain more than 120% from here. We doubt that it will materialize anytime soon. Still, DXCM stock looks undervalued, trading at just 7x trailing revenues, versus its last three-year average P/S ratio of 17x.

While DXCM stock looks like it can see higher levels over time, it is helpful to see how DexCom’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 8/21/2024
[2] Cumulative total returns since the end of 2016

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