Down More Than 50% From Its High, Is DexCom Stock a Buy?

A top healthcare stock to own over the years has been DexCom (NASDAQ: DXCM). The company makes continuous glucose monitors (CGMs) that help diabetics track their glucose levels. CGMs are necessary devices for many people, particularly those who have type 1 diabetes. And given the increasing number of people with diabetes in the world, investing in a company which makes these devices has generally proven to be a great investment: DexCom's stock is up more than 560% in the past 10 years.

2024, however, has been a different story. The healthcare stock is in a tailspin, trading down more than 50% from its high after a steep sell-off following its latest earnings report. When a top growth stock goes into a steep decline, that can make for a great buying opportunity. It can also be a sign that something is terribly wrong with the business.

Let's examine which category DexCom might fall into.

What led to DexCom's massive sell-off this year?

DexCom wasn't rolling along unencumbered by any means this year, but when it reported earnings a couple of months ago, the wheels really came off of the stock.

On July 25, the company posted its latest earnings numbers. They weren't all bad, as sales for the June quarter rose by 15% to just over $1 billion. The more troubling development was a reduction in full-year guidance; DexCom management projected annual revenue of no more than $4.05 billion, which is considerably below even the low end of its previous guidance of $4.2 billion to $4.35 billion.

What alarmed analysts and investors was the reason behind the change: It was largely due to a restructuring of the salesforce. It's an odd reason. Some analysts wondered if it was really due to other factors, such as an uptick in the use of GLP-1 weight loss treatments, which may have led to some people no longer needing to track their glucose levels.

Have the markets overreacted to bad guidance?

When a stock falls more than 40% on a single day, as DexCom did due to underwhelming guidance, it's hard to not call that an overreaction in the markets. It's not as if the company's business is in distress and suddenly all its growth prospects are in doubt. DexCom is still a leading provider of CGMs, and while analysts may not have liked the company's answer for the guidance reduction, that doesn't mean it's not true.

As an example, take Abbott Laboratories, which also makes CGMs. In its latest earnings results, it actually upgraded its guidance on strong results. Its business is broader, but diabetes care is a key reason it's achieving such good growth. If there were some weakness in demand for CGMs, it seems unlikely that Abbott would have upgraded its guidance. This leads me to believe there may be some other factors, such as those to do with the sales team, which may indeed be impacting DexCom's guidance.

DexCom has been a terrific growth stock for years. At the very least, investors may have wanted to wait for more than just a short-term development and trend before pulling the plug.

Should you buy DexCom stock today?

DexCom's business may be experiencing a bit of a slowdown right now, but that doesn't mean it's in bad shape for the long run. It's trading near its 52-week low, and as long as you're willing to buy and hold, now may be a good time to buy the stock.

Always resist the urge to make a knee-jerk decision based on one quarter or guidance adjustment. But DexCom still looks like a good stock to own, and this recent sell-off allows you to buy it at a much more attractive price.

Should you invest $1,000 in DexCom right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool recommends DexCom. The Motley Fool has a disclosure policy.