By Jacob Sonenshine

Sometimes the best way to fix a mistake is to double down on it -- and that is just what DexCom is doing with its continuous glucose monitors for diabetes patients. It's a decision that should pay off handsomely for shareholders.

DexCom made a costly mistake last year. The San Diego--based maker of glucose monitoring devices for people suffering from diabetes decided to shift its focus away from patients with Type 1 -- which often develops in childhood -- to the larger Type 2 market of people who generally develop it later in life. Unfortunately, DexCom's focus changed so much that its Type 1 sales shriveled up. As a result, the company was forced to reduce 2024 sales guidance by $200 million last July, to about $4 billion. Shares of DexCom tumbled 41%, to $64 on July 26, the worst day in the stock's 20-year history.

The good news is that DexCom's decision to pursue the Type 2 market wasn't faulty -- of 38.4 million people in the U.S. who have diabetes, fewer than 10% have Type 1. It was management's execution of its strategy that caused the problem. Since that July call, DexCom has decided that doubling down on Type 2 makes more sense than trying to recover Type 1, which looks like the right decision. What's more, insurance companies are increasingly likely to cover the cost of continuous glucose monitors, or CGMs, which should expand their use.

With growth expectations reset and shares trading at a substantial discount to where they were before their tumble, DexCom looks ready to recapture its losses -- and then some.

"Mid-'24 execution stumbles should be in rearview," writes Truist Securities analyst Richard Newitter. "While competition has intensified, we believe DXCM has a large underpenetrated T2 opportunity ahead, and with reimbursement efforts more secure, should begin to drive accelerating penetration into this segment in 2025+." He has a $102 price target on DexCom stock, up 22% from Tuesday's close of $83.76.

Newitter isn't being hyperbolic in noting the size of the Type 2 opportunity. Only 7% to 8% of Americans with diabetes use continuous glucose monitors, which employ a sensor that goes beneath the skin to monitor and display blood sugar level, replacing the finger pricks of old. That percentage should double over the next three years, Newitter estimates, which means DexCom has plenty of runway -- especially as the new generation of devices doesn't need to be changed as often.

"Establishing coverage for the 25 million people with diabetes, but not on insulin, is a work in progress for DXCM," Newitter writes.

DexCom competes mainly with Abbott Laboratories, which sold $6.4 billion of CGM devices last year. Other companies like Medtronic are moving into the diabetes device business, but no company has nearly the CGM revenue and manufacturing scale of DexCom and Abbott. Right now, Abbott has the advantage, offering a device that lasts 15 days to DexCom's 10-day product.

But Dexcom's own 15-day CGM is set to debut before the end of 2025, which should help it compete with Abbott. It will also help boost DexCom's profitability because two of its devices will now do the job of three -- cutting its costs by a third -- but the company will generate the same amount of revenue because it will charge more for the 15-day devices, says Jefferies analyst Matthew Taylor, who has a Buy rating and $110 price target on DexCom shares.

The resulting jump in gross margins will happen gradually, as current users won't fully transition to the new device for another few years. But each year, as the mix of sales moves increasingly toward the newest monitor, margins will improve. Analysts forecast a 68% gross margin by the end of this decade, up from 62% now.

Estimates are far less demanding, however. Analysts expect 14% sales growth this year and another 15%, to $5.3 billion, in 2026, well below the 20% annual growth the company delivered before its 2024 wipeout. Earnings, meanwhile, are expected to grow 24% annually over the two years after 2025.

DexCom's valuation, at 36.8 times 12-month forward earnings, down from 57 times one year ago, is also less demanding. But if DexCom can get back to 20% sales growth, it could regain some of its premium valuation -- providing an additional boost to the stock.

"It's going to continue to take time for investors to come back to the name and feel comfortable that the results can be trusted," says BTIG analyst Marie Thibault, who noted that continued earnings beats will catalyze stock gains. She has a Buy rating and $109 target, up 30%.

Expect DexCom stock to see a spike -- the healthy kind.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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July 09, 2025 01:30 ET (05:30 GMT)

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