Type 2 Coverage Expansion And AI Features Will Shape A Balanced Long Term Outlook

Catalysts

About DexCom

DexCom develops and sells continuous glucose monitoring systems used by people with diabetes around the world.

What are the underlying business or industry changes driving this perspective?

• Although broader commercial coverage for type 2 diabetes patients not using insulin, including more than 6 million covered lives across large PBMs and an expected expansion to over 7 million with Prime Therapeutics, supports a larger addressable base, future revenue growth still depends on converting the roughly two thirds of covered patients who are not yet using CGM. This may cap near term growth if adoption remains slow relative to coverage additions, with a knock on effect for earnings.
• Despite DexCom’s focus on securing Medicare and other global reimbursement for type 2 non insulin users, the timing and any conditions attached to possible CMS coverage remain uncertain. As a result, the company’s long term revenue mix and margin profile could be pressured if this large population is reached more slowly than management aspires to, particularly for U.S. revenue and operating margin expansion.
• While demand for longer wear sensors and accuracy improvements is reflected in the G7 15 Day launch and customer feedback, maintaining current gross margin levels could be challenging if higher resin and fuel costs persist. DexCom is already accounting for a 50 to 100 basis point potential impact from oil related inputs, which could limit further gross margin and EBITDA margin improvement.
• Although AI driven features such as the redesigned Stelo app and the DexCom Smart Basal dosing module may support better user engagement and retention, integrating these tools into varied clinical workflows and consumer habits takes time. Any friction in adoption could moderate growth in active users and reduce the uplift to revenue and net margins that higher utilization typically brings.
• While international markets have been a source of strong reported growth, future contribution depends on continued access wins, tender outcomes and successful launches of products like Stelo and a new CGM system. Any slower than hoped uptake or less favorable pricing in these regions could weigh on overall revenue growth and limit further operating margin leverage.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on DexCom compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DexCom's revenue will grow by 9.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 19.3% today to 21.8% in 3 years time.
• The bearish analysts expect earnings to reach $1.4 billion (and earnings per share of $3.38) by about May 2029, up from $930.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.7 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.6x on those 2029 earnings, down from 25.4x today. This future PE is lower than the current PE for the US Medical Equipment industry at 23.8x.
• The bearish analysts expect the number of shares outstanding to decline by 1.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Broader commercial coverage for type 2 non insulin patients, including more than 6 million currently covered lives and an expected increase to over 7 million with Prime Therapeutics, could support higher CGM adoption over time, which would be a positive surprise for revenue and earnings.
• Potential CMS coverage for type 2 non insulin users, together with upgraded ADA standards of care and growing real world evidence and randomized controlled trial data, may expand the eligible population and support a higher long term active user base, which would be supportive for revenue and net margins.
• Product improvements such as the G7 15 Day sensor, new adhesive technology, AI driven Stelo app redesign and Smart Basal dosing feature, along with consistently high customer satisfaction scores, could support better retention and utilization, which would benefit revenue, gross margin and operating margin.
• Continued international access wins, tender participation and new launches such as Stelo and a new CGM system, combined with the existing 26% reported international revenue growth and 17% international organic growth in Q1 2026, may sustain a higher contribution from overseas markets, which would support revenue growth and EBITDA margin.
• DexCom’s strong current financial position, including Q1 2026 worldwide revenue of US$1.19b, gross margin of 63.5%, operating margin of 22.2%, adjusted EBITDA margin above 30% and a cash balance of US$2.4b with significant free cash flow, provides capacity for continued investment in R&D, manufacturing and possible acquisitions. This could support future revenue, earnings and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for DexCom is $65.0, which represents up to two standard deviations below the consensus price target of $83.92. This valuation is based on what can be assumed as the expectations of DexCom's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $112.0, and the most bearish reporting a price target of just $65.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $6.4 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $61.35, the analyst price target of $65.0 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.