Monday witnessed a significant rise in the stock price of DexCom, a leading provider of continuous glucose monitoring devices. The company's shares have surged by 36% since June 2022, outpacing the S&P 500's gain of 19% during the same period. This increase is primarily attributed to a decrease in inflation due to aggressive rate hikes by the Federal Reserve, coupled with DexCom's robust revenue growth in recent quarters.
Despite this positive performance, DexCom's stock (NASDAQ:DXCM) is still trading at a level significantly lower than its late 2021 peak of $163 per share prior to the inflation shock. An 11% drop in the last month has been largely linked to the potential broader application of obesity drugs by Novo Nordisk (NYSE:NVO) and possibly Eli Lilly (NYSE:LLY). There are concerns that these drugs could impact the market for medical devices used to manage diabetes.
To regain its pre-inflation shock level, DXCM would need an increase of over 60%. Currently trading at 13 times revenues, compared to its five-year average of 21 times revenues, there are implications that the stock may be undervalued.
The company's stock has demonstrated a robust Sharpe Ratio of 0.7 since early 2017, higher than the S&P 500 Index's Sharpe Ratio of 0.6 over the same period. However, it remains lower than the Trefis Reinforced Value portfolio's Sharpe Ratio of 1.3.
A comparison analysis shows that DXCM's stock declined by 61% during the financial crisis of 2008 but recovered by about 100% post-crisis. The company's performance through the inflation shock of 2022 has been analyzed in relation to this.
DexCom's financial fundamentals have remained strong in recent years. Its revenue has increased by 117% to $3.2 billion over the last year, compared to $1.5 billion in 2019. The company's margin has also expanded from 9.4% in 2019 to 14.0% currently.
The company's total debt rose from $1.1 billion in 2019 to $2.0 billion in 2022, while its cash reserves increased from around $0.4 billion to $0.6 billion during the same period. With an additional $0.7 billion generated from operations in 2022, DexCom appears well-positioned to meet its short-term obligations.
As the Federal Reserve continues its efforts to control inflation rates, DXCM stock may see further gains once recession fears subside. However, the potential impact of obesity drugs on DexCom's market remains a key risk factor.
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