Will DexCom Stock Recover To Its Pre-Inflation Shock Highs of $160?

DXCM: DexCom logo
DXCM
DexCom

DexCom stock (NASDAQ: DXCM) currently trades at $102 per share, about 36% higher than the level seen in early June 2022, just before the Fed started increasing rates, compared to 19% gains for the S&P 500 during this period. The rally in the stock over recent months has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession. The notable increase in DexCom’s revenues over recent quarters has also contributed to the stock recovery.

Interestingly, DexCom stock has had a Sharpe Ratio of 0.7 since early 2017, higher than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Despite its outperformance over the last twelve months or so, DXCM stock is still much lower than its pre-inflation shock high of $163, seen in late 2021. It has seen an 11% decline in the last month or so. This can be attributed to the reduced risk of cardiovascular events for obesity drugs of Novo Nordisk and likely Eli Lilly. Investors are concerned about the possible broader applications of obesity drugs and their impact on medical devices used to manage diabetes.

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Returning to the pre-inflation shock level means that DXCM stock will have to gain more than 60% from here. We believe that will materialize over time. DXCM currently trades at 13x revenues compared to its last five-year average of 21x, implying that the stock is undervalued. Our DexCom Valuation Ratios Comparison dashboard has more details.

Our detailed analysis of DexCom’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how DXCM stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index.
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08).
  • 3/1/2009: Approximate bottoming out of S&P 500 index.
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008).

DexCom And S&P500 Performance During 2007-08 Financial Crisis

DXCM stock saw a 61% decline from $3 in September 2007 (pre-crisis peak) to $1 in March 2009 (as the markets bottomed out). It recovered sharply post the 2008 crisis to levels of around $2 in early 2010, rising about 100% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

DexCom’s Fundamentals Over Recent Years

DexCom’s revenue rose 117% to $3.2 billion over the last twelve months, compared to $1.5 billion in 2019. New customer additions are leading the revenue growth for DexCom amid rising awareness of CGM devices. DexCom is among the few players with regulatory approvals for its wearable continuous glucose monitoring (CGM) device. Not only has the company seen stellar revenue growth, but it also saw its margin expand from 9.4% in 2019 to 14.0% now. Our DexCom Operating Income Comparison dashboard has more details.

Does DexCom Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

DexCom’s total debt increased from $1.1 billion in 2019 to $2.0 billion in 2022, while its cash increased from around $0.4 billion to $0.6 billion. The company also garnered $0.7 billion in cash flows from operations in 2022. Given its solid cash cushion, the company is in a good position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe DXCM stock has the potential for gains once fears of a potential recession are allayed. That said, the concerns over the broader application of obesity drugs and its impact on DexCom remain a key risk factor for realizing these gains.

While DXCM stock looks like it can see higher levels over time, it is helpful to see how DexCom’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 DXCM Return 1% -10% 580%
 S&P 500 Return 0% 17% 101%
 Trefis Reinforced Value Portfolio -2% 29% 564%

[1] Month-to-date and year-to-date as of 9/15/2023
[2] Cumulative total returns since the end of 2016

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