DexCom Stock Soars 16% After Q1 Earnings and Buyback News

DexCom (NASDAQ:DXCM) saw a notable 16% increase in its stock price on Friday, spurred by its Q1 earnings release and a new share buyback announcement. The company reported first-quarter sales of $1.04 billion, surpassing the analyst forecast of $1.02 billion. However, its earnings per share (EPS) of $0.32 fell slightly short of the expected $0.33. Although DexCom reaffirmed its full-year sales guidance, it lowered its gross margin forecast to 62%, down from the previous estimate of 64-65%. Despite these mixed results, the announcement of a $750 million share repurchase program likely drove the stock’s upward momentum.

With this performance and the significant rise in stock price, a pressing question arises: Is DXCM stock a buy now that it’s trading above $80? Our assessment suggests otherwise. Currently, DXCM seems overpriced based on its present valuation.

Evaluating DexCom’s Current Valuation Against the S&P 500

When comparing DexCom’s valuation metrics to those of the broader market, it appears costly.

• DexCom’s price-to-sales (P/S) ratio stands at 8.0, while the S&P 500 averages 2.8.
• The price-to-free cash flow (P/FCF) ratio for DexCom is 28.1, compared to 17.6 for the S&P 500.
• Furthermore, its price-to-earnings (P/E) ratio is 60.9, versus the S&P’s 24.5.

Recent Revenue Growth of DexCom

DexCom has experienced remarkable revenue growth in recent years.

• Over the past three years, DexCom’s revenue has grown at an average rate of 18.2%, compared to the S&P 500’s growth of 6.2%.
• In the latest quarter, DexCom’s revenue increased by 12% to $1.04 billion, up from $921 million a year earlier, while the S&P 500 saw a 4.9% rise.

Profitability Metrics of DexCom

The company’s profit margins sit around the median among its peers in the Trefis coverage universe.

• DexCom recorded an operating income of $633 million over the last four quarters, yielding a moderate operating margin of 15.2%, compared to 13.1% for the S&P 500.
• The company’s operating cash flow (OCF) was $964 million, reflecting a solid OCF margin of 23.2%, in contrast to 15.7% for the S&P 500.
• For the same period, DexCom’s net income was $535 million, resulting in a net income margin of 12.9%, versus 11.3% for the S&P 500.

Financial Stability of DexCom

DexCom’s balance sheet appears very strong.

• As of the most recent quarter, DexCom’s total debt was $2.6 billion, while its market capitalization was $32 billion, leading to a strong debt-to-equity ratio of 9.3%, compared to 21.5% for the S&P 500.
• Cash and cash equivalents account for $2.6 billion of DexCom’s total assets of $6.5 billion, giving it a cash-to-assets ratio of 39.8%, which is well above the 15.0% average for the S&P 500.

Resilience of DXCM Stock During Market Downturns

Over recent downturns, DXCM stock has experienced greater losses than the S&P 500.

Inflation Shock (2022)

• DXCM stock dropped 58.2%, from a high of $162.81 on November 17, 2021, to $67.99 on June 16, 2022, compared to a decline of 25.4% for the S&P 500.
• The stock has not yet returned to its pre-crisis high.
• Since then, DXCM reached a maximum of $140.45 on April 9, 2024, and is currently trading around $82.

COVID-19 Pandemic (2020)

• DXCM stock fell 36.8% from $75.63 on February 20, 2020, to $47.79 on March 18, 2020, compared to a 33.9% decline for the S&P 500.
• By April 16, 2020, DXCM had fully recovered to its pre-crisis peak.

Global Financial Crisis (2008)

• During the financial crisis, DXCM stock fell by 87.0%, from $2.67 on October 9, 2007, to $0.35 on November 20, 2008, versus a peak-to-trough decline of 56.8% for the S&P 500.
• DXCM fully recovered to its pre-crisis peak by March 23, 2010.

Final Assessment of DXCM Stock

In conclusion, DexCom’s performance across various metrics can be summarized as follows:

• Growth: Very Strong
• Profitability: Neutral
• Financial Stability: Extremely Strong
• Downturn Resilience: Neutral
• Overall: Strong

While DexCom displays impressive metrics, its current high stock valuation seems to reflect this strength. The announced share buyback is a positive development, but DexCom faces fundamental challenges. The growing use of GLP-1 drugs is expected to shrink the overall diabetes market, posing a significant risk. Moreover, the near-term pressure on its margins raises further concerns. Hence, it may be wise for investors to wait for a potential price dip before considering entering a position in DXCM stock.

The elevated valuation of DXCM stock limits its near-to-mid term upside potential. Investors might find more value in alternative portfolios that have previously outperformed benchmark indices.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.