“Be greedy when others are…..insert your own thought”
Intro:
Today we will take a look at Dexcom (DXCM). As recently as two days ago it was a leader in glucose monitoring for diabetics. Today it sits in the gutter after one earnings report. So what does this company do? And why did it just drop 40% in a single day? Let’s take a look at this fire that lives within a dumpster.
Subscribe
Background:
A Dexcom CGM system is an FDA-cleared wearable device that tracks your glucose levels continuously throughout the day and night. Your glucose reading is sent to your smartphone, smart device † or receiver as frequently as every five minutes. Thanks Google, cool. But what does this mean from a financial and investment perspective?
Why did it drop it like its hot?:
Well, let’s take a look under the hood. Despite reporting that revenue grew YoY 15% to 1.004B, yes billion, with a B. And a EPS beat of 0.43 v. 0.39 expected. The stock managed to fall like knife through hot butter, dropping from over $100 to nearly $60 in a single trading session.
BUT WHY THO—Dear Mom – Wholesome Badass
Simply, they guided down from an expected annual rev of 4.3B to only 4.0B. A 300M drop in expected rev that lead to a 25 billion, yes, billion with a B again, drop in market cap.
In fairness they did admit to having a poor plan for rolling out their new Stelo device as well as a terrible decision to update their sales and operations which lead to the decrease in projected annual revenue. As the analysts at Leerink and William Blair explained, that issue stemmed in part from a revamping of DexCom's sales team that included changing responsibilities along with which physicians sales-team members would try to work with. While that overhaul was intended to capitalize on the popularity of its technology, it ended up disrupting sales. (market watch)
But surely there must be more? Oh yes, they annouced a $750M share buyback. Sus, I know, lucky for them, they can buy back their shares at half off! Red dot sell! I digress, let’s look at some pretty charts.
Charting / Crayons / Astrology for Stocks:
Leading the way is the weekly chart on a 5 year basis, to take us back to the before times of Covid, see below.
Oof, indeed, that candle would make Clifford the big red dog blush.
Clifford's Really Big Movie | Clifford the Big Red Dog Wiki | Fandom
Now let us look at the 5 year weekly chart and its volume profile to find the point of control, in red below….ouch.
As seen above it has fallen into a fib level of 78.6% dating back to before covid in 2019 and a volume gap just above the $60 level. I would expect buyers to step in here with resistance back into the 5 year value window in gold starting at $78.33. This level also lines up with previous lows over this timeframe.
This chart is so visibly screwed that its hard to infer too much. Profitable companies usually don’t have moves like this, even on poor guidance. Especially in the midst of a bull market and a potentially lower rate environment.
That being said, I like this level, particularly if it holds the high 50s. There just isn’t enough to justify this drop on earnings. We will look more into financials to see why.
Financials / Stats:
Below is a snippet from the sec 10-Q report that was just released for Q2 earnings on 25Jul2024.
Currently DXCM has almost 1B in cash on hand, up 100M from last quarter, bad? I know.
Revenue up and net income up YoY, omg, the world is ending. Yes, net incoming was down from 146M in the previous Qtr, but not a huge miss. We can zoom out to see what it looks like over time.
How about margins? Complements of macrotrends. They still look healthy with net margins trending up.
Looking at these data alone, one would conclude that a -40% drop is a gross over reaction for what may very well be a one off quarter and 6 month period. However, we arent here to only look at the good. Let’s play devils advocate.
Potential Downside:
GLP1s – It’s hard to ignore the impact of GLP1 medications on the diabetes space. After all, I did a write up myself some months ago on NVO, linked here. Let us no get ahead of ourselves though. Yes, GLP1s are in the process of rocking many sectors in the cardio, diabetes and obesity markets, but they don’t rule the world…yet.
GLP1 medications target mainly type 2 diabetics whereas the CGM (continuous glucose monitor) tech that Dexcom employs targets type 1. There isn’t much overlap in their target audience, so these medications, in the near term, should not be impacting sales. After all other CGM companies like PODD just pre released their earnings which actually guided up! Abbott is also reporting soon and these reports should ease worries about this particular sector.
Speak of, Abbott, a leader in the space of CGM. Leerink analysts said sorting out the company's sales force would help keep it pace with Abbott and other rivals. The William Blair analysts said they expected the market for continuous glucose monitoring to keep growing over the next few years. Further pointing only to a minor hiccup in a longer term growth market. There should be more than enough room in the TAM to support both companies.
Conclusion:
While there are some concerns, looking at this objectively, it appears to be a short term over reaction. The company as a whole is still very healthy with a bright future in a growing space with few competitors that would have a significant advantage. Least we forget they are also rolling out an OTC monitor which will be available to anyone and compatible with apple and android wearable devices for an ever growing health conscious world.
I still have concerns walking away from the earnings call. But this all seems to be self inflicted and reversable from a management standpoint. Nothing has changed from a longer term point of view and therefore the price cut and PE cut feels excessive. Currently the RSI sits at 11, guh, a smidge oversold. For these reasons I have taken up 77 60c options for 8/16 and 59 70c options for 11/15.
My expecation is that this will bounce back and slowly begin to grind its way up, I will shed the shorter dated calls and hang on to the october calls, which I will consider rolling out further depending on how this plays out.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
Charles Dickens – The Tale of Two Cities
Leave a Reply