New G7 And Stelo Launches Will Shape Future Markets

Key Takeaways

• Expansion of prescriber base and new over-the-counter CGM products are poised to boost revenue and improve net margins through wider market penetration.
  
• Coverage expansion by major PBMs and product advancements like the Dexcom G7 System are key revenue growth drivers, backed by a significant share repurchase program.
  
• FDA scrutiny, logistical challenges, and international market volatility may pressure DexCom's margins, liquidity, and earnings amid inflation and regulatory concerns.

Catalysts

A medical device company, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally.

• DexCom's recent commercial investments led to expanding their prescriber base, which anticipates further revenue growth as physicians expand their Dexcom CGM prescribing patterns. This expansion, combined with new technology and broader access, impacts future revenue positively.
  
• The launch of Stelo as the first over-the-counter CGM, along with software and connectivity updates, is expected to boost customer experience and penetrate the type 2 diabetes market, leading to revenue growth and potentially improving net margins as these updates attract more users.
  
• The coverage expansion by the three largest PBMs for all people with diabetes represents a significant catalyst for future revenue growth, given that this covers nearly 6 million people with type 2 diabetes not on insulin.
  
• The introduction of the 15 Day Dexcom G7 System, which improves wear time and sensor accuracy, is expected to impact sales positively by providing a competitive advantage. This product advancement may enhance revenue and net margins due to premium pricing and increased demand.
  
• The recently announced $750 million share repurchase program reflects confidence in future revenue and earnings growth, suggesting improvements in earnings per share as a result of a reduced share count.

DexCom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DexCom's revenue will grow by 15.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $3.26) by about May 2028, up from $535.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.6 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.6x on those 2028 earnings, down from 59.7x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.3x.
• Analysts expect the number of shares outstanding to decline by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

DexCom Future Earnings Per Share Growth

Risks

• The warning letter from the FDA indicates potential compliance issues at DexCom’s San Diego and Mesa facilities, which may lead to increased scrutiny and potential impacts on manufacturing processes and costs, thereby affecting margins and earnings.
  
• Supply chain challenges and inventory issues, exemplified by chartering direct flights for distribution at higher costs, suggest ongoing logistical obstacles that could continue to pressure operating margins and net earnings.
  
• DexCom's international revenue growth was notably lower than expected, highlighting potential exposure to volatile international market dynamics and regulatory environments, which could impact future revenue projections.
  
• The need to maintain significant cash reserves and institute a $750 million share repurchase program, while reassuring, may indicate that the company is anticipating potential financial pressures or strategic maneuvers that could limit liquidity for other growth initiatives, affecting overall earnings.
  
• Inflationary pressures from tariffs and fluctuations in the global trade landscape are being factored into cost structures, potentially increasing production costs and squeezing gross margins if these pressures persist or worsen.

Valuation

• The analysts have a consensus price target of $97.685 for DexCom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $82.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.3 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $81.53, the analyst price target of $97.68 is 16.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.