3 reasons why DexCom looks like a no-brainer to buy right now

DexCom (DXCM -1.27%) is a big name in diabetes care. Its continuous glucose monitors (CGMs) help people track their blood glucose levels.

But the stock has underperformed this year amid declining growth (the company projects an organic growth rate of about 11% to 13%, much lower than in the past). Investors have also been increasingly concerned about its prospects, especially if the weight-loss drug can lead to a reduction in diabetes cases in the long term.

Down more than 40% this year, DexCom shares have been on the decline. But while it might seem like a troubling time to own the stock, here are three reasons why I would consider buying it.

1. There are significant future opportunities in diabetes care

We’ve always seen DexCom as an attractive long-term play due to the increasing prevalence of diabetes and the growing number of people who will need to manage their glucose levels with insulin. According to estimates from Lancet medical journal, by 2050, there will be approximately 1.3 billion people in the world with diabetes.

That’s more than twice the 529 million people estimated by experts to have the disease in 2021. In the vast majority of cases, researchers believe it will be due to type 2 diabetes and weight gain, which will be in the back of growth.

Given the growing popularity of glucagon-like peptide-1 (GLP-1) weight loss drugs and their ability to help people lose weight, investors may believe that this will reduce the number of diabetes cases in the future. This, in turn, could decrease the need and demand for CGM in the long term.

But it is still early innings for many of these drugs, and it would be premature to assume that they will significantly affect the number of people who develop diabetes. For many, these drugs are not affordable solutions and in some cases may not be practical due to side effects.

And even if GLP-1 drugs prevent some cases of diabetes, the overall trend is still so significant that it should ensure high demand for CGMs in the long term.

2. The launch of Stelo will expand the company’s potential

An exciting market opportunity for DexCom is to provide a solution for people who do not require insulin injections, or even those who may not have diabetes but simply want to track their glucose levels to make sure they stay healthy. The company recently launched a product just for that: Stelo.

It is the first over-the-counter glucose biosensor that the Food and Drug Administration has cleared for use in the US. The device will provide people with information about their glucose levels, with the data easily accessible via a smartphone.

Stelo launched this year and could be an underrated growth catalyst. It could make DexCom’s products accessible to a wider market and thus significantly expand the company’s prospects beyond just helping people with diabetes.

3. The stock valuation is incredibly attractive

In the past, DexCom has always looked like an extremely expensive stock, trading at a significant premium to its trailing earnings, and that was one of the biggest reasons to avoid it. But because of this year’s strong selloff, it’s now priced at a much more sustainable valuation. And not only is the stock trading near a 52-week low, but if it falls much further, it could also hit a four-year low.

Investors buying the stock today are paying about 43 times its trailing earnings. It may seem expensive, but given the long-term growth potential, it seems cheap, especially when you consider how much investors have paid for it in the past.

DXCM PE report data by YCharts; PE = price to earnings.

DexCom is still a great growth stock right now

Investors may not be thrilled about DexCom’s slowing growth this year, but the top line is still growing by double-digit percentages. And in the long term, there is still huge opportunity for the business, especially as it expands its growth prospects with the launch of Stelo.

As a leading CGM manufacturer, DexCom is likely to play a significant role in diabetes care for years, possibly decades. With all that upside potential, healthcare stocks look like an unusual long-term buy now that they’re trading at a much more modest price.