This US Healthcare Stock’s Share Price Crashed Nearly 41% in One Day: Is it Time to Buy?
Healthcare has been an increasingly important priority in many countries as governments seek to rein in burgeoning healthcare costs.
One disease that is in the spotlight is diabetes, a chronic illness characterised by high levels of blood glucose which, over time, leads to severe damage to the heart, blood vessels, eyes, and kidneys.
Back in 2000, 151 million aged 20 to 79 were diagnosed with this disease but this number has since more than tripled to 537 million in 2021.
DexCom (NASDAQ: DXCM) helps people suffering from Type II Diabetes to control and monitor their blood glucose levels through its innovative continuous glucose monitoring (CGM) systems.
This healthcare company’s share price, however, saw a sharp 41% plunge recently to hit its 52-week low of US$62.34.
The fall is the sharpest-ever for the stock since the company went public in 2005 and year-to-date, the stock is down around 43.4%.
Should growth investors see this as a great opportunity to accumulate the stock?
Missing analyst expectations along with weaker guidance
Investors may be wondering about the reason for DexCom’s share plunge.
The company had just released its financial results for the second quarter of 2024 (2Q 2024) which saw its quarterly revenue rise 15% year on year to US$1 billion.
This revenue number slightly missed analysts’ expectations of US$1.04 billion, but it was management’s revised guidance that was responsible for the sharp plunge.
Previously, revenue was projected to be between US$4.2 billion to US$4.35 billion in 2024.
Management revised its guidance downwards to between US$4 billion to US$4.05 billion, with CEO Kevin Sayer attributing the challenges to a restructured sales force and the company garnering fewer customers than expected.
DexCom also underperformed in the durable medical equipment channel and saw more customers claiming rebates on its newest CGM product, G7.
A healthy track record of growth
Digging deeper into DexCom’s financials, the company has seen steady growth over the years.
Revenue went from US$2.4 billion in 2021 to US$3.6 billion in 2023 with gross margin averaging around 65% across the three years.
Net profit also rose in tandem, going from US$216.9 million in 2021 to US$541.5 million.
The company also generated consistent and growing positive free cash flow over these three years.
This momentum continued into the first half of 2024 (1H 2024).
Revenue climbed 19.4% year on year to US$1.9 billion for 1H 2024 and net profit surged by 76.2% year on year to US$289.9 million.
The healthcare company also saw free cash flow jump 72.5% year on year to S$365.6 million for the half year.
If DexCom achieved the mid-point of its 2024 guidance, it would represent an 11% year-on-year increase in revenue, far lower than the 24.5% year-on-year top-line growth it chalked up in 2023.
A large total addressable market
This revised guidance may be just a minor blip for DexCom as it enjoys a large total addressable market (TAM).
The number of adults with diabetes is projected to rise to 783 million by 2045, according to IDF Atlas, thus ensuring that the pie is growing for all CGM players.
CGM is now the industry standard for diabetes management, and DexCom has achieved many “firsts” with its device.
Its app was the first to receive approval to share glucose data with a caregiver and its device was also a pioneer in enabling integration with Automated Insulin Delivery systems.
It was also the first CGM that could connect directly to Apple’s (NASDAQ: AAPL) Apple Watch and is the first CGM cleared for use without a prescription.
According to the CDC National Diabetes Statistics Report, there are more than 25 million people in the US with Type II Diabetes who have not progressed to insulin therapy, thereby opening up ample opportunities for DexCom to grab more customers.
DexCom G7 and its international push
DexCom released its latest version of its CGM device, G7, in February 2023.
Since then, the company has completed software updates almost monthly and has introduced a simplified software infrastructure for ease of use.
G7 has generated considerable traction in the US and gained momentum across all segments and channels there.
The CGM device increased its subscriber base by around 40% in 2023 with more than 70% of new scripts written by primary care physicians.
Management is ready to enter new geographies with this device as part of its international push.
DexCom will also introduce Stelo in late August, its first product targeted at people with diabetes who are not on insulin treatment.
Get Smart: DexCom looks cheap on valuations
After the recent plunge, DexCom’s price-to-earnings ratio stands at around 43.3 times.
Source: Y Charts
This is the company’s lowest valuation in the past five years.
DexCom still enjoys a growing TAM and is well-positioned to capture more customers through its innovative G7 CGM device and the upcoming launch of Stelo.
The sales team restructuring is a short-term problem that should be resolved over time.
Meanwhile, investors who are looking at growth stocks can consider adding this quality healthcare company to their buy watchlist.
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Disclosure: Royston Yang owns shares of Apple.
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