DexCom (NASDAQ: DXCM) shareholders must have had a nasty shock when they checked in on the share price last week. The growth stock dropped 40% on 26 July — its largest ever one-day fall!
Now DexCom isn’t a stock I hold or follow. But in my experience, it’s always worth digging into the reasons why a previously popular share has spectacularly fallen out of favour. After all, Wall Street has a tendency to overreact, occasionally offering up lucrative buying opportunities.
I’ve got some spare cash to invest in August. Should I consider this stock? Let’s dig in.
Why’s the stock down?
Dexcom’s a medical device firm known for its continuous glucose monitoring (CGM) systems. These are used by individuals with diabetes to monitor their blood glucose levels in real-time. A family member of mine has one of these. It’s impressive technology.
The company’s growth has been impressive for years. This is reflected in the fact the share price is still up around 77% over five years, even after the 40% drop.
In the second quarter, the firm’s revenue rose 15% year on year to $1bn, a smidgeon below analysts’ expectations. Its adjusted earnings per share came in $0.43, topping Wall Street’s forecasts.
As we know though, the market’s forward-looking. And it was the company updating of its full-year guidance that spooked investors. Management now expects revenue to be no more than $4.05bn rather than a minimum of $4.2bn.
Recently, the firm restructured its sales team, while there’s also been rising competition from Abbott Laboratories and Medtronic. On the quarterly earnings call, CEO Kevin Sayer said DexCom was “short a large number of new patients as to where we thought we would be at this point in time.”
Is something else going on?
I have to think fears about GLP-1 weight-loss drugs must also be part of this epic sell-off. These help manage blood glucose levels, support weight loss, and provide additional health benefits.
So I’m a bit torn here, to be honest. On the one hand, I suspect this is an overreaction and presents a long-term buying opportunity. The number of people suffering with diabetes worldwide is expected to rise to 642m by 2040, according to Diabetes.co.uk, up from an estimated 415m today.
On the other hand, the stock’s still trading at 37 times forecast earnings. That’s not exactly bargain basement territory. And if the firm does confirm in coming quarters that GLP-1s are impacting its business, I’d expect another large drop in the share price. It’s a big risk.
The threat of GLP-1 disruption
Weight-loss drugs are something I’ve been thinking about quite a bit with regard to my own portfolio. They are known to reduce cravings for fatty and sugary foods, as well as the desire to consume alcohol in some patients.
I recently sold my McDonald’s holding in part because I also own Greggs shares. And I’m invested in spirits giant Diageo. I don’t want too much exposure to this if it becomes a major issue (I think it might).
Therefore, I’m going to pass on this stock for now. But I’ll continue watching this space to see if GLP-1 concerns spread to other firms. Irrational selling may create some generational buying opportunities.
