It’s time to talk about one of the most interesting healthcare stocks on my radar.
Last year, I started covering DexCom, Inc. (NASDAQ:DXCM), the producer of medical devices from San Diego, California.
Over the past ten years alone, the stock has returned 1,100%, beating the S&P 500 and the SPDR Health Care ETF (XLV) by a margin that can be seen from space.
Since 2005, DXCM has returned 22.9% per year. This turns every $1 invested in DXCM into more than $40!
My most recent article on this company was written on December 11, 2023, when I went with the title “Up 60%, Why I Believe DexCom Is One Of The Best Healthcare Stocks Money Can Buy.”
A few months later, DXCM is up only 1%, lagging the 9% performance of the S&P 500 by roughly 800 basis points.
Hence, in this article, I want to focus on its just-released earnings and long-term developments that point to a high likelihood of elevated long-term gains, including benefits related to weight-loss drugs, so-called GLP-1s, which used to be seen as the biggest headwind imaginable for the industry.
So, as we have a lot to discuss, let’s get to it!
DexCom’s Financial Growth Is Impressive
Let me start this article by throwing a few numbers at you – in this case, the company’s just-released 4Q23 earnings.
In the fourth quarter of last year, DexCom reported very robust financial results, with worldwide revenue reaching $1.035 billion, reflecting a substantial increase from the $815 million reported in the fourth quarter of 2022.
This growth of 27% on a reported basis and 26% on an organic basis, excluding currency effects and non-CGM (continuous glucose monitoring) revenue acquired or divested, underscored the company’s strong performance and justified its “lofty” valuation.
U.S. revenue saw significant growth, totaling $769 million, up 27% from the previous year, driven by the success of the G7 product and improved market access.
Similarly, international revenue experienced a 27% increase, reaching $265 million, with organic growth at 23%.
DexCom Inc.
Despite a slight decline in gross margin to 64.2%, mainly due to the higher proportion of G7 sales with a higher cost profile, DexCom maintained disciplined spending, with operating expenses growing at half the rate of revenue.
Adding to that, operating income for the fourth quarter was $242.7 million or 23.5% of revenue, compared to $172.1 million or 21.1% of revenue in 4Q22.
Adjusted EBITDA stood at $321.5 million or 31.1% of revenue, reflecting a significant improvement from $237.1 million or 29.1% of revenue in the fourth quarter of 2022.
Essentially, these numbers highlight the company’s operational efficiency and ability to generate strong profitability amidst growth, as growing revenues isn’t enough. Investors want to see both higher revenues and stronger margins.
The Path To Sustained Elevated Long-Term Growth
A fantastic quarter is obviously a good thing.
However, what I care most about is new business developments and forward-looking statements that can tell us something about the potential future of this business.
As discussed in prior articles, last year, the company embarked on several strategic initiatives aimed at expanding its global presence and advancing its technological capabilities.
For example, the company launched G7 and Dexcom ONE into multiple new markets, significantly broadening its access to customers worldwide.
DexCom Inc.
These product launches were accompanied by significant advancements in technical and clinical work, laying the groundwork for DexCom’s future growth and innovation.
DexCom Inc.
According to the company, the successful rollout of G7 in the U.S. market received exceptional feedback from customers and clinicians, who highlighted its accuracy, user-friendly design, and clinical efficacy.
Furthermore, DexCom witnessed a notable shift in prescribing patterns following the introduction of new products and the expansion of coverage, particularly with Medicare coverage for individuals with type 2 diabetes using basal insulin.
DexCom Inc.
During its earnings call, the company noted that primary care physicians accounted for over 70% of new prescriptions, indicating the increasing importance of this channel in DexCom’s growth strategy.
Going forward, the company’s efforts to expand its presence with prescribers are expected to further enhance its market penetration and reach millions of individuals with diabetes, including those using insulin and those with type 2 diabetes.
As we can see in the overview below:
Global diabetes cases are expected to rise to more than 780 million in 2045. In the year 2000, that number was 151 million!
25% of U.S. healthcare dollars are spent on people with diabetes.
Diabetes tends to be a significant financial burden on people, which makes the solutions DexCom offers financially attractive.
DexCom Inc.
With this in mind, DexCom announced the upcoming launch of Stelo, the first CGM specifically designed for people with type 2 diabetes who are not on insulin.
By leveraging its leading sensor platform, Stelo will offer a tailored software experience to meet the unique needs of this population.
With a 15-day wear time and plans for initial launch as a cash-pay product, Stelo aims to show its ability to drive better health outcomes and economic value for individuals with diabetes.
DexCom expects FDA approval and the subsequent launch of Stelo in the summer of 2024.
DexCom Inc.
Furthermore, with regard to the potential threat of GLP-1, the company continues to be upbeat.
This is what I wrote in my prior article:
[…] GLP-1s are NOT a headwind for DexCom. The company’s CGM solutions are a big part of the GLP-1 therapy for obese patients.
DexCom Inc.
DexCom sees these treatments as complementary rather than mutually exclusive. The company views lifestyle change as an essential element in diabetes prevention and management, and CGM is positioned as an integral part of facilitating this lifestyle change.
Even better, data proves that GLP-1 therapies become more powerful when combined with CGM.
During its latest earnings call, the company hinted at the potential benefits of combining Stelo with GLP-1s.
We know — we have a very good idea where this data comes out because we’ve seen in all our studies patients have better outcomes or healthier. We end up saving the system money. And those are the outcomes that we’re hoping to drive with Stelo over time. With respect to GLP-1s, again, the list of studies ongoing is very large. And there are studies where CGM is an element. – DXCM 4Q23 Earnings Call
With all of this in mind, the company makes the case that its platform technology allows for customization to address the diverse needs of different populations, supported by a redesigned software infrastructure for quicker iteration and enhanced connectivity.
DexCom continues to invest in hardware technology, with a focus on launching extended wear sensors across all product offerings.
By leveraging its leadership position in connectivity and continuous glucose monitoring, DexCom believes it is well-positioned to capitalize on the significant opportunities in the diabetes management market and drive sustainable long-term growth, which is reflected in its guidance.
With that said, looking ahead to the four quarters of 2024, DexCom provided guidance anticipating total revenue in the range of $4.15 to $4.35 billion, representing organic growth of 16% to 21%.
This guidance reflects confidence in continued momentum, particularly in the U.S. type 2 basal-only population, the expansion of Dexcom ONE on the G7 platform into new markets, and the anticipated launch of Stelo in the summer of 2024.
Additionally, the company expects to divest its non-diabetes distribution business in Australia and New Zealand.
From a margin perspective, DexCom forecasts non-GAAP gross profit margin to be in the range of 63% to 64%, operating profit margin around 20%, and adjusted EBITDA approximately 29%.
DexCom Inc.
It also has a very healthy balance sheet, with analysts expecting 2024 net debt to fall to $1.5 billion, which would be 1.2x EBITDA.
So, what does this mean for its valuation?
Valuation
Analysts agree with the company and are even more upbeat about the years after 2024.
Using the data in the chart below:
This year, analysts expect the company to grow EPS by 15%, followed by 26% growth in 2025 and 27% expected growth in 2026.
Currently, DXCM trades at a blended P/E ratio of 78x. If the company were to keep a 70x multiple in the years ahead, which – I believe – fits its growth profile, it could return roughly 18% per year.
FAST Graphs
As always, I need to add that these numbers are just estimates based on a valuation that makes sense and expected growth. It does not include a dividend, as DXCM does not distribute cash through dividends. It merely uses buybacks to offset stock-based compensation.
Even if the company’s growth turns out to be weaker than expected, I believe that DXCM has the power to return more than 12-14% per year on a very consistent basis.
The only reason why I haven’t bought the stock yet is because I’m figuring out how to structure the healthcare part of my portfolio. I’m also not sure how to incorporate non-dividend-paying stocks in my long-term portfolio, which consists of 100% dividend-paying stocks.
Takeaway
DexCom impresses with its robust financial growth and strategic initiatives, positioning itself for sustained long-term gains.
With a focus on innovation, market expansion, and product development, including the upcoming launch of Stelo, DXCM demonstrates its commitment to addressing the diverse needs of diabetes management.
Despite its non-dividend-paying status, DXCM’s potential for consistent returns remains strong, supported by favorable analyst expectations and a compelling growth outlook.
Pros & Cons
Pros:
Impressive Financial Growth: DexCom’s consistent revenue growth and improved margins demonstrate its operational strength and profitability potential.
Innovative Products: The company’s focus on developing cutting-edge medical devices, like the G7 and Stelo, highlights its commitment to addressing diverse market needs and staying ahead in the industry.
Market Leadership: DexCom’s strong market position and global presence provide stability and potential for further expansion, offering investors confidence in its long-term prospects.
Positive Outlook: With optimistic guidance and forecasts for continued growth, DXCM presents an attractive investment opportunity for those seeking sustained returns in the healthcare sector.
Cons:
Market Volatility: Despite its impressive performance, DXCM’s stock price may be subject to fluctuations, influenced by market sentiments and regulatory factors, potentially impacting short-term returns.
Limited Dividend Policy: For investors focused on dividend income, DXCM’s lack of a dividend distribution may keep them from considering it as a core holding in their portfolio.
Risks of Innovation: While DexCom’s innovative products offer opportunities for growth, there are risks associated with technological advancements, including regulatory challenges and competitive pressures.
