Down 40% in 1 Day, Is DexCom Stock Still a Buy?

July 25 was a difficult day for DexCom (NASDAQ: DXCM) shareholders, with the company's second-quarter earnings release crashing the stock by 40%. To make matters worse, at the moment it's unclear whether its troubles are just a bump in the road, or it's starting down a rocky path.

So is the stock still a smart purchase, given the steep discount it's trading at right now? Let's investigate.

Some new headwinds might never abate

DexCom's shocking crash wasn't caused by poor earnings. In fact, it slightly beat analysts' expectations for its quarterly earnings per share (EPS) , reporting $0.43 per share when $0.39 was the consensus estimate. Its revenue growth looked fine, too, rising by 15% year over year to reach just over $1 billion on a reported basis.

The trouble is that its rate of growth is decelerating. In Q1, its top line was growing by 25% year over year, a pace that was in line with the prior three quarters. So there's at least one external factor that's pumping the brakes on its progress. And management sees the slowdown continuing. Rather than bringing in up to $4.35 billion in sales for 2024, DexCom now foresees a maximum of $4.05 billion in revenue.

To make matters worse, its market share in the durable medical equipment segment appears to be eroding. Given that the company's bread and butter consists of continuous glucose monitors (CGMs) for helping with blood sugar management in people with diabetes, that's a core segment, to say the least.

Note that these shrinking expectations and market-share losses are happening in the context of DexCom entering new countries to sell its wares, and also launching new products both last year and this year. In other words, its revenue base should be expanding more quickly than before, not more weakly. The implication is that serious problems are afoot in its competitive positioning.

Per management, the expectation was for DexCom to onboard far more patients into using its CGMs. Management further claimed that the disruption of shaking up its sales force to expand into new markets drove some of the ongoing issues. But other problems may be stickier.

Competitors like Abbott Laboratories are producing CGMs that are comparable to DexCom's, and they aren't going away. Likewise, the blockbuster medicines for type 2 diabetes that are produced by Eli Lilly and Novo Nordisk may be causing some patients to feel they don't need a CGM from DexCom, because their blood glucose is adequately controlled. While that may not be a wise decision medically, their perceptions could very plausibly be creating a headwind to sales.

So, for the moment, DexCom's near future looks stormier than anticipated.

A recovery is possible, but it'll take time

There's a good chance that DexCom stock will gain in value again. The company's downward revision of earnings guidance and mounting headwinds will make for a difficult next few quarters, with further losses likely. But it's nowhere close to going out of business, and it still has plenty of flexibility to invest in new growth opportunities.

DexCom has more than $3.1 billion in cash, equivalents, and marketable investments on hand; it's still profitable, and it expects to continue to be. Its group of onboarded patients will likely continue to use their CGMs, contributing revenue via purchases of consumables and add-on services. Once its international sales force is in order, it'll start to penetrate new markets faster.

What's more, after the fall of DexCom's stock, it's harder to make an argument that its shares are overvalued. Its trailing-12-month price-to-earnings (P/E) multiple is 39.7, still a bit higher than the market's average of 26.2, but far less than its triple-digit P/E ratios from just a couple of quarters ago. So while it isn't a bargain, it's priced cheaper than before, in keeping with lowered expectations for its growth potential.

Should you buy this stock? At the moment, the risks of headwinds are far higher than before. But if you're willing to hold DexCom through a few more quarters of disruption, it could be a decent addition to your portfolio -- assuming its growth actually picks up again, that is.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool recommends DexCom and Novo Nordisk. The Motley Fool has a disclosure policy .