We think that Dexcom stock (NASDAQ: DXCM) currently is a better pick compared to Abbott stock (NYSE:ABT), despite Dexcom being more expensive of the two. Dexcom trades at about 25x trailing revenues, compared to just 5x for Abbott. Although both the companies have benefited from the rise in demand for wearable continuous glucose monitoring (CGM) devices that does not require finger pricks, Dexcom’s financial performance has been better over the recent years, as Abbott is more diversified, and some of its businesses, including medical devices, were hurt during the pandemic. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Abbott vs Dexcom: Sector Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Dexcom’s Revenue Growth Has Been Stronger
Now, although Abbott’s revenue growth over the last twelve months period was slightly stronger than Dexcom (28% vs. 26%), given a sharp rebound in the demand for medical devices, with the rise in volume of elective surgeries, things are very different if were to look at the three year average revenue growth. Dexcom’s last three fiscal year CAGR of 39% is nearly 5x that of 8% CAGR for Abbott. Note that the revenue base for Abbott is much larger with $40 billion sales in the last twelve months compared to just $2 billion for Dexcom.
Looking forward, Dexcom is expected to see strong revenue growth with continued demand for its CGM devices and the launch of the new G7 device that is 60% smaller in size compared to the current G6, making it the smallest CGM device available in the market. Abbott has a similar device – Freestyle Libre – and its sales will also see strong growth, given the limited competition for both of these companies. That said, Abbott generates most of its revenues from other segments, which are unlikely to see strong growth in the long run. With economies now opening up, the demand for medical devices is likely to remain high in the near term, but it will normalize after the backlog of procedures is cleared. Our Abbott Revenues dashboard provides more insight on the company’s revenues.
2. Both Companies Have Seen Similar Margin Growth
Similar to the pattern seen in revenue growth, Abbott’s operating margin growth of 18% over the last twelve month period is slightly better than the 16% for Dexcom. However, if we were to look at last three fiscal year change in operating margin, Dexcom’s 26% figure tops Abbott’s 4% change. Dexcom’s operating margin of 15.9% over the last twelve month period compares with 9.4% in 2019, before the pandemic. The current operating margin of 18.5% for Abbott is higher compared to Dexcom, and it compares with the 14% figure in 2019. Overall, for both the companies, margins are on the rise, but the pace is better for Dexcom. We expect margins for both companies to pick up going forward. While Abbott stands to benefit from continued demand for its Covid-19 tests in the near term, followed by an increased demand for medical devices with rise in procedure volume, Dexcom’s margins could also pick up with the launch of G7 and continued CGM devices market share gains.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for medical devices is likely to rise going forward, boding well for Abbott. For Dexcom, not much has changed during the pandemic. It has continued to gain market share for its CGM devices. As the Covid-19 crisis winds down, the demand for Covid-19 testing will likely see a significant fall, and the medical devices sales will also normalize after the backlog of procedures is cleared. Abbott’s Freestyle Libre, though, will likely continue to see strong growth. However, for Dexcom, its growth outlook is dependent on market share gains for its CGM devices and it is likely to remain high over the coming years, given the limited competition, great benefits (such as no finger prick), and a wide base of diabetic patients (over 34 million just in the U.S.).
Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in the U.S. are higher than what they were a few months back. That said, both the companies have seen margin expansion since the pandemic. While Abbott’s current valuation is surely more attractive than that of Dexcom, with ABT stock trading at about 5.4x trailing revenues, versus 24.9x for Dexcom, the latter has demonstrated better revenue growth and margin expansion over the last few years. Not only that, even if we were to look at financial risk, Dexcom’s 3.2% debt as a percentage of its equity is much lower than 8.6% for Abbott, and Dexcom’s 19% cash as percentage of assets is also better than the 12% figure for Abbott. Overall, Dexcom trumps Abbott in most of the metrics that matter for investors and we think this gap in valuation between Abbott and Dexcom is largely justified. In fact, looking forward, it is likely that the gap in valuation of these two companies will remain in the foreseeable future and Dexcom may continue to outperform with its better growth prospects and lower risk.