Analyzing the Key Factors of DXCM – A Deep Dive

Shares of DexCom (DXCM) jumped 3.0 % during today's afternoon session, bringing their 52 week performance to 30.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's poor growth indicators and mixed market sentiment.

DexCom, Inc., a medical device company, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The large-cap Health Care company is based in San Diego, United States and has 7,500 full time employees.

DXCM Has a Higher P/E Ratio Than the Sector Average

Compared to the Health Care sector's average of 24.45, DexCom has a trailing twelve month price to earnings (P/E) ratio of 158.7 and an expected P/E ratio of 71.4. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $0.72 or forward earnings per share of $1.6.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since DexCom's P/E ratio is higher than its sector average of 24.45, we can deduce that the market is overvaluing the company's earnings.

DexCom Is Overvalued in Terms of Expected Growth

DexCom's PEG ratio is 2.48. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in DexCom's case, it tells us the company is overvalued.

DXCM Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since DexCom's P/B ratio of 21.01 is higher than its sector average of 4.16, such a margin of safety does not exist for the stock.

DXCM Is Generating Cash

DexCom has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of -17.2%, compared to -16.2% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -18.5% and a coefficient of variability of 61.8%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2019-12-31 314,500 -180,000 134,500 -51.37
2020-12-31 475,600 -199,000 276,600 418.95
2021-12-31 442,500 -389,200 53,300 -82.51
2022-12-31 669,500 -364,800 304,700 n/a

DexCom's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing DexCom's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

DexCom's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2019-12-31 1,476,000 544,500 63.11 -5.01
2020-12-31 1,926,700 646,600 66.44 -3.19
2021-12-31 2,448,500 768,000 68.63 6.04
2022-12-31 2,909,800 1,026,700 64.72 n/a

DexCom's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2019-12-31 1,476,000 789,200 9.64 -37.97
2020-12-31 1,926,700 980,600 15.54 43.09
2021-12-31 2,448,500 1,414,700 10.86 -19.2
2022-12-31 2,909,800 1,491,900 13.44 n/a

DexCom's cost of revenue is growing at a rate of -14.7% in contrast to -14.7% for operating expenses. Sales revenues, on the other hand, have experienced a -15.6% growth rate. As a result, the average gross margins growth is -0.6 and the average operating margins growth rate is -8.0, with coefficients of variability of 3.6% and 21.4% respectively.

DexCom Benefits From Positive Market Signals

The market sentiment regarding DexCom is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $175.0 to $131.0. DXCM is trading -24.1% away from its target price of $150.58. 4.4% of the company's shares are tied to short positions, and 100.7% of the shares are held by institutional investors.

Date Reported Holder Percentage Shares Value
2023-03-31 Vanguard Group Inc 11% 44,112,133 $5,041,355,281
2023-03-31 Blackrock Inc. 9% 33,266,336 $3,801,843,331
2023-06-30 Baillie Gifford and Company 4% 16,723,298 $1,911,222,173
2023-03-31 State Street Corporation 4% 16,143,716 $1,844,984,642
2023-03-31 Sands Capital Management, LLC 4% 13,738,968 $1,570,158,008
2023-03-31 FMR, LLC 3% 10,807,868 $1,235,177,233
2023-03-31 JP Morgan Chase & Company 3% 10,764,828 $1,230,258,407
2023-03-31 Capital Research Global Investors 2% 9,274,615 $1,059,949,409
2023-03-31 Geode Capital Management, LLC 2% 8,282,663 $946,584,171
2023-03-31 Nuveen Asset Management, LLC 2% 7,857,922 $898,042,644
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.