DexCom Q2 Earnings: Conventional Market Overreaction (NASDAQ:DXCM)

I’m initiating protection on DexCom, Inc. (NASDAQ:DXCM) following its Q2 2024 earnings launch on Thursday, July twenty fifth.

DexCom, Inc. is a medical machine firm centered on insulin monitoring, particularly steady glucose screens that assist monitor insulin ranges all through the day. The firm’s income is generated primarily from gross sales of the gadgets and companies supporting them.

After a robust run in late 2023 and early 2024, DexCom dropped 33% following Q2 earnings once they lowered steerage for 2024. This places the inventory down 38% over the previous 12 months.

DexCom’s steerage was positively unfavorable and couldn’t assist the share worth over $110. That stated, I consider this can be a traditional overreaction to dangerous information, and the inventory has now been pushed nicely beneath honest worth.

DexCom could have decreased development steerage, however the enterprise remains to be rising. As well as, demographic tailwinds are too robust to disregard, and well being insurers will turn out to be more and more motivated to advertise this know-how. Even on the lowered steerage, a conservative DCF evaluation primarily based on enterprise and market developments suggests a worth goal of $94.30, a 26% upside to right this moment’s pricing.

I charge DexCom a purchase and consider the market overreaction is offering an ideal alternative for long-term traders to enter the inventory.

Q2 Earnings Recap

DexCom reported Q2 EPS of $0.43, beating consensus by $0.04, and income of $1.00 billion, lacking consensus by $33 million.

Income development slowed, particularly in {hardware} income, with complete income development returning to 2022 ranges. Necessary to notice that prices had been nicely managed and this had minimal affect on profitability.

Administration expects the slower income development to proceed and lowered income steerage for the 12 months sending the inventory plunging.

And that is the place the market overreacted. Definitely, they deserved a cheaper price goal; I might have lowered it, too. Nonetheless, the up to date steerage nonetheless displays double-digit development and no change in profitability. That is nonetheless a really beneficial enterprise.

Valuation

I ran a DCF evaluation incorporating the brand new steerage and market developments. Listed here are the assumptions I used:

• 12% near-term income development primarily based on near-term market CAGR, low-end of administration steerage, and historic efficiency
• 6.5% long-run development charge heading again market CAGR to account for competitors, price development, and diminishing returns because the enterprise scales
• 9.1% low cost charge primarily based on estimated WACC

This DCF evaluation yields a worth goal of $94.30, 26% upside to right this moment’s costs.

Wall Avenue analysts really land in the same vary with a median worth goal of $98.42 and a spread of $75 to $152. Word that the low finish of their vary is basically flat to present pricing.

Demographic Tailwinds Too Sturdy To Ignore

DexCom is a frontrunner in a quickly rising market with extremely favorable demographic tailwinds. Beginning with diabetes care gadgets in isolation, the market is predicted to develop at a CAGR of 12.22% via a minimum of 2029.

Past the present expectations for diabetes care gadgets, the eligible inhabitants is predicted to develop quickly. Mature markets similar to North America and Europe will proceed to see double-digit development, whereas creating areas similar to South America, Africa, and Asia will see wherever from 50% to 134% in diabetes prevalence.

And this solely displays diabetes prevalence. DexCom can also be engaged on instruments and gadgets for prediabetes and diabetes prevention. This over-the-counter market is predicted to develop to over $5 billion over the subsequent 10 years, a billion greater than DexCom’s complete income final 12 months.

Well being Insurers Want CGM

Past the demographic developments, well being insurers are going to turn out to be increasingly motivated to assist steady glucose monitoring.

Well being insurers medical prices are anticipated to develop on the highest charge because the early 2010s pushed by GLP-1 medicine and acute inpatient/outpatient utilization.

This development advantages DexCom in two methods. First, GLP-1 medicine for treating diabetes are being authorised for weight reduction quickly driving up prices. This spending almost doubled from 2021 to 2022 alone. DexCom reduces the necessity for GLP-1 and insulin over time via monitoring and supporting life-style modifications.

Second, steady glucose screens have been confirmed to scale back general medical prices for managing diabetes by decreasing the speed of inpatient and outpatient acute care, the troubling development famous above.

Draw back Danger

The draw back threat is primarily execution on the a part of DexCom’s administration. CEO Kevin Sayer famous all through the earnings name that points with distributor relationships had come up materially impacting gross sales.

U.S. buyer development has remained robust in our pharmacy enterprise as we increase our attain into main care and sort 2 diabetes extra broadly. Nonetheless, our development within the DME channel has trailed our plan. The DME distributors stay essential companions for us in our enterprise, and we have not executed nicely this quarter towards these partnerships. We have to refocus on these relationships.

DexCom drives increased profitability by way of distributors than pharmacies and must rapidly rectify this relationship.

The second draw back threat is competitors. Upside requires pacing with or simply behind the market over-time and DexCom must be cautious not to surrender an excessive amount of share.

Verdict

Q2 earnings had been positively a problem for DexCom and the revised steerage could not assist the $110 plus share worth. Nonetheless, demographic developments together with price pressures on the insurance coverage trade all bode nicely for future development. DCF evaluation even on the low finish of steerage and market developments helps a worth goal of $94, 26% upside from right this moment’s pricing. Whereas there may be draw back threat from execution, particularly on the gross sales aspect, administration is conscious and taking steps to mitigate.

Primarily based on all the above, I firmly consider the market overreacted to the steerage change. I charge DexCom a purchase with the present downturn being an ideal alternative to enter the inventory.