Medical machine specialist DexCom (DXCM 9.46%) has been on fireplace over the previous 12 months, considerably outperforming the broader market. The healthcare firm can thank a number of tailwinds for its efficiency, together with the continued adoption of the know-how it has helped pioneer — steady glucose monitoring (CGM) — and the launch of recent merchandise.

However DexCom nonetheless has some upside left, at the least if we go by Wall Road’s predictions. The corporate’s present common worth goal of $132.22 (in line with Yahoo! Finance) represents a 19% upside over its inventory worth of about $111 as of this writing. Ought to buyers comply with the Road’s recommendation and purchase DexCom’s shares? Let’s dig in and discover out. 

The benefit of steady glucose monitoring

CGM units give diabetes sufferers a a lot better choice to preserve monitor of their blood sugar ranges. Usually, these with diabetes have to attract blood with a tool generally referred to as a glucometer that measures the quantity of sugar within the blood pattern. However this technique is painful and suffers from one different main downside: It solely tells sufferers their blood glucose ranges at a particular level once they measure it. Enter CGM choices, like DexCom’s G6. 

The G6 system has a small sensor inserted below the pores and skin that measures blood glucose ranges as soon as each 5 minutes. That is 12 instances per hour and 288 instances per day. Getting access to this a lot information can permit sufferers to higher navigate the day-to-day challenges of residing with diabetes. The G6 additionally sends alerts to suitable units if blood glucose ranges go above or beneath a predetermined threshold. 

This selection is superior. And it has helped DexCom make critical headway within the diabetes market. The corporate at present serves an estimated 1.7 million sufferers worldwide, and its G6 is the most well-liked CGM system on the planet. Additional DexCom’s income has grown. Final 12 months, the corporate’s prime line jumped by 19% 12 months over 12 months to $2.91 billion.

However there may be loads of upside left. There are 37.3 million diabetes sufferers within the U.S. alone. In accordance with the World Well being Group, there are 422 million of them globally. DexCom’s put in base of 1.7 million is only a minuscule portion of that. The corporate does have a number of opponents, however it leads this market with Abbott Laboratories, whose CGM units franchise, the FreeStyle Libre, generated $4.3 billion in income in 2022.

DexCom has been capable of proceed to extend its income and its put in base regardless of the competitors from the a lot bigger Abbott Laboratories. 

Even when there’s a mixed 20 million CGM customers worldwide (an unlikely quantity), there may be nonetheless large room to develop globally. And that is earlier than we add the truth that the inhabitants of sufferers with diabetes will preserve an upward trajectory for many years. In the meantime, DexCom has launched the G7, an up to date CGM system whose sensor is smaller than that of the G6.

It began launching it in Europe final 12 months and will achieve this within the U.S. this 12 months. The DexCom ONE is one other machine that focuses on simplicity and accessibility (by way of worth). These newer units will assist DexCom because it continues to achieve new customers. 

A strong purchase regardless of the dangers 

All firms face dangers. DexCom is not any exception to this iron rule. Let’s contemplate two potential headwinds for buyers to think about earlier than initiating a place on this healthcare firm; the primary is valuation. DexCom’s shares look richly valued, with a ahead price-to-earnings ratio of 106. That appears excessive by nearly any customary. By comparability, the S&P 500‘s ahead P/E is simply 20. DexCom’s valuation is probably going a mirrored image of the corporate’s prospects and the truth that it has traditionally grown its income very quickly.

Previously 5 years, DexCom’s prime line has elevated by a median of 42.5% per 12 months. Corporations with spectacular income progress and engaging alternatives usually command a lot larger premiums. Nonetheless, DexCom could possibly be weak to heightened volatility within the brief time period, particularly if it fails to reside as much as buyers’ expectations that are, to some extent, already baked into its inventory worth. 

One other drawback for DexCom could possibly be elevated competitors from Apple, which has been growing non-invasive methods to measure sufferers’ blood glucose ranges. It may ultimately combine this function into a few of its units just like the Apple Watch. In accordance with current studies, Apple has reached the proof-of-concept section of its work on this space. What ought to buyers consider these potential issues for DexCom? 

Let’s begin with the second. It is necessary to notice that the proof-of-concept stage is a flowery manner of claiming, there may be actual promise right here, however there may be nonetheless an extended approach to go. It could possibly be 5 years or extra earlier than this know-how sees the sunshine of day if it does in any respect. And whereas valuation is a matter, DexCom may justify its wealthy premium over the long term, given the huge alternative forward within the diabetes market. Will the healthcare firm meet the Road’s predictions within the subsequent 12 months?

My view is that it’ll. However even when it would not, DexCom nonetheless appears to be like like a wonderful long-term wager.