Down More Than 50%, Is DexCom Stock a Bargain Now?

This year started with healthy gains for DexCom (NASDAQ: DXCM) stock, but they didn't last long. The medical device stock is now down by about 53% from the high-water mark it set in April.

DexCom markets one of the world's most popular constant blood glucose monitors (CGM). These discreet devices adhere to the back of a person's arm and steadily measure their blood sugar, then transmit the data they collect to the person's smartphone or Apple Watch.

Given its strong position in its market, it's natural to wonder why DexCom stock was beaten down -- and whether it can get back up and outperform in the years ahead.

Why DexCom stock fell hard

In July, shares of DexCom fell by about 40% after management lowered its sales guidance. Second-quarter sales rose 15% year over year, but for the third quarter, it expects sales growth of just 1% to 3%. DexCom also lowered its revenue expectations for the full year to a range between $4 billion and $4.05 billion. Three months earlier, management had told investors to expect revenue of $4.2 billion to $4.35 billion in 2024.

If there's one thing that Wall Street hates, it's uncertainty about a fast-growing business's growth trajectory. Investors were extra concerned about Dexom's guidance revision because they hadn't seen a similar sales-slowdown warning from its lead competitor -- Abbott Laboratories (NYSE: ABT), which markets the FreeStyle Libre brand of CGM devices.

The FreeStyle Libre is only responsible for about 15% of Abbott's total revenue, but its sales are rising fast. In the second quarter, FreeStyle Libre sales were up 18.4% year over year to $1.6 billion. That was about 60% more CGM revenue than DexCom reported in the same period.

Reasons to buy DexCom now

DexCom's addressable market is so large that even attracting a modest share would be enough to grow its business by leaps and bounds. In the U.S. alone, there are around 29.4 million adults who have been diagnosed with diabetes, plus an estimated 8.7 million more who have it, but haven't been diagnosed yet.

That massive addressable population is getting even larger. Around 38% of America's adult population has prediabetes, according to the Centers for Disease Control and Prevention. Monitoring how their bodies respond to different foods and exercise is a great way for people with prediabetes to understand what they need to do to prevent the disease's progression. There are also plenty of healthy folks without diabetes who simply want to monitor how their blood sugar concentrations respond to exercise and sleep. To address this need, in August, DexCom launched Stelo, an over-the-counter CGM for adults who aren't using insulin.

Reasons to remain cautious

DexCom expects its third-quarter sales to creep upward by about 1% to 3% year over year, but even after its plunge, the stock still has a lofty forward price-to-earnings ratio of around 39.8. That multiple would be more appropriate for a business that can be expected to grow its bottom line by a double-digit percentage year after year. So DexCom stock could fall a lot further if management says the slowdown predicted for the third quarter will persist. The company's Q3 announcement is scheduled for Oct. 24 after the market closes.

A DexCom CGM isn't the only new tool physicians can use in the battle against diabetes. In August, Eli Lilly reported results from a three-year study of tirzepatide, its treatment for both diabetes and weight management, that suggest DexCom's addressable market could shrink significantly. In that study, adults with prediabetes and obesity or overweight reduced their risk of progression to type 2 diabetes by 94% with weekly tirzepatide injections. In addition, participants lost an average of 22.9% of their body weight.

Medtronic is a giant medical device maker with a large footprint in the diabetes space. In August, the FDA approved its first disposable all-in-one CGM, which will compete with DexCom's devices. Medtronic also announced a new collaboration with Abbott, which will supply a CGM that works with Medtronic's automated insulin delivery system. Combining Abbott's leading technology with the most popular insulin delivery system will likely make Abbott an even stronger competitor in the CGM market.

A bargain now?

At its current valuation, DexCom stock is the opposite of a bargain. Even after its big drop over the summer, it would still be a risky stock to buy now. Those who are interested would probably do best to wait for a few quarters to see if it can return to its previous growth rate.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories and Apple. The Motley Fool recommends DexCom and Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.