San Diego, Calif.-based medical device company DexCom, Inc. (DXCM) develops and distributes continuous glucose monitoring (CGM) systems for diabetes management in the United States and internationally. DXCM’s first-ever Super Bowl advertisement to drive awareness of its Dexcom CGM technology among patients, and the recent coverage expansion of its Dexcom G6 CGM System, have attracted investors’ attention, as evidenced by the stock’s 11.5% gain over the past month.

Indeed, the stock has gained 20.7% year-to-date to close yesterday’s trading session at $446.39.

But while DXCM is a dominant player in the CGM market, it faces stiff competition from other key players that are making significant headway in the continuous glucose monitoring space. And, although the company reported better-than-expected first quarter results, the stock’s stretched valuation could make investors nervous.

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Here is what we think could influence DXCM’s performance in the coming months:

Stiff Competition

With increasing demand for wearable continuous glucose monitoring devices and related tech-driven blood sugar reading systems, major players such as Medtronic PLC (MDT), Abbott Laboratories (ABT), and DXCM have been expanding into new markets to boost their sales prospects. However, increasing competition in the CGM market could be a major concern for DXCM. ABT’s more affordable FreeStyle Libre portfolio and MDT’s updated wearable continuous glucose monitoring product line could make it difficult for DXCM to grow its market share in the near term.

Expanded Coverage of CGM System

Last month, DXCM announced that its diabetic patients, aged two years or older, that are going through intensive insulin therapy, would be eligible for provincial coverage of the Dexcom G6 CGM System through British Columbia PharmaCare. In addition, the provinces of Saskatchewan, Quebec and Yukon in Canada will be providing public coverage of its CGM systems under provincial health plans for people living with type 1 diabetes. As more people access DXCM’s CGM technology, its market opportunity should  increase significantly.

Mixed Growth Potential

A $2.34 billion consensus revenue estimate for its fiscal year 2021 represents a 21.4% increase year-over-year. The company’s revenue is expected to decrease 21.2% from the prior-year quarter to $2.83 billion next year. DXCM beat the consensus EPS estimates in three of the trailing four quarters. However, analysts expect its EPS to decline 27.1% year-over-year to $2.26 in the current year. They also expect it to decline 33% in the next quarter, ending in September 2021.

Stretched Valuation

In terms of non-GAAP forward P/E, DXCM is currently trading at 194.74x, which is 701.9% lower than the 24.28x industry average. Its 99.99 and 19.96 respective forward EV/EBITDA and Price/Book ratios are significantly lower than the 16.31 and 4.49industry averages. DXCM’s 146.53  forward Price/Cash Flow multiple is 683.4% lower than the 18.71 industry average.

Consensus Price Target Indicates Potential Upside

Of the 20 Wall Street analysts that have provided ratings for the stock, eight rated it Buy and three rated it Hold. Currently trading at $446.39, analysts expect the stock to hit $475.7 in the near term, indicating a 6.6% potential upside. Their price targets range from a low of $380 to a high of $540.

POWR Ratings Reflect Uncertainty

DXCM has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. DXCM has a C grade for Growth. This is in sync with the stock’s mixed growth prospects.

In terms of Value Grade, DXCM has a C. The stock’s higher-than industry P/E ratio is consistent with the value grade. Also, it has a C Stability grade, indicating higher volatility.

In addition to the grades we’ve highlighted, one can check out additional DXCM ratings for Sentiment, Momentum, and Quality here. DXCM is ranked #107 of 185 stocks in the C-rated Medical – Devices & Equipment industry.

Click here to view the top-rated stocks in the Medical – Devices & Equipment industry.

Bottom Line

While rapidly expanding coverage and the initiative to drive better awareness of its G6 CGM System have been driving up DXCM’s share price, the stock’s upside could be limited given the competitive pressure from other major players in the market. So, we think investors should wait for the company to show further strength before investing in the stock.

Click here to checkout our Healthcare Sector Report for 2021

DXCM shares were unchanged in premarket trading Wednesday. Year-to-date, DXCM has gained 20.74%, versus a 17.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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