DexCom Is Great. Here’s Why You Shouldn’t Buy It.

DexCom (DXCM -2.81%) is not a stock that investors should be rushing to sell. It has a few different opportunities to continue pursuing to generate growth, it has plenty of recurring revenue, and the valuation of its shares is reasonable. But you still shouldn’t buy it right now.

The odds are good that it’ll continue to be a decent performer moving forward. Still, it’s facing two key issues that need to be navigated successfully for the stock to be worth buying once again. Let’s take a look to understand why it’s a much riskier play than it was before.

Why it’s a great stock and a great company

DexCom has a handful of things going for it that make it the kind of business which investors would usually like to own. First, its key product — continuous glucose monitors (CGMs) — help provide it with a consistent stream of recurring revenue. People with diabetes wear its CGMs, which are attached to the body, for a couple of weeks, then discard them and buy more.

The whole point of a CGM is to help patients regulate their blood glucose levels, which they probably will need to do for the rest of their lives, and so onboarding new customers will likely drive earnings growth for years to come. Even if customer acquisition costs are on the higher end, in the long run, repeated spending and the opportunity to upsell customers on new products, or software services related to their CGMs, make the process quite lucrative.

As a result, DexCom’s trailing 12-month (TTM) revenue and net income have grown steadily over the past five years, reaching sales of $3.9 billion  and net income of $666.9 million. Take a look at this chart:

DXCM Revenue (TTM) data by YCharts.

What’s more, the business is pursuing new avenues for growth by entering into international markets like the U.K., Germany, Japan, Spain, Bulgaria, Romania, and beyond. It isn’t done penetrating the U.S. market, either.

In late August, it launched the first-ever over-the-counter glucose sensor, thereby lowering the barrier to patients buying its products even further. It’s hard to envision DexCom not continuing to add to its revenue over the next few years and beyond, especially as more and more people are diagnosed with diabetes.

So why not buy it?

The competitive landscape is quickly shifting against it

There are two big reasons why this stock is not a great choice for most investors at the moment. Competition is becoming a more important factor, and some of DexCom’s peers are tremendously powerful.

In particular, Abbott Laboratories and its FreeStyle Libre line of CGMs pose a distinct threat to DexCom’s market share, as does Medtronic‘s Guardian Connect device. At some popular distributors, one of Abbott’s CGMs is about one-third as expensive as DexCom’s. There is only so much that the companies can do to differentiate their products from one another. This makes competition on price a potent way of stealing market share, especially when the gap between options is so large.

So the business will likely need to spend more on marketing and research and development (R&D) to differentiate itself as much as possible, drive down the unit prices it offers customers, and market its products more aggressively. That’ll put pressure on its earnings, and possibly revenue growth too. These pressures are mild now, but they’re only going to increase over time as more players enter the space.

The other big reason why it’s somewhat risky to invest in DexCom’s stock is that the demand for CGMs may not be as large in the future as it is today. This is thanks to the proliferation of new and highly effective medicines that treat type 2 diabetes and obesity, which is a major risk factor for developing diabetes. Eli Lilly and Novo Nordisk are both making blockbuster drugs that could head off the need for many millions of people to use CGMs at all.

While DexCom and Abbott see their CGMs as improving blood glucose control in combination with use of these medications, the clinical benefit may not yet be entirely clear. More data may clarify that point in the company’s favor, but for now it may add further uncertainty.

With a bit of time and some more spending on marketing and R&D, it is very possible that DexCom will continue onward as vigorously as it ever has, enriching its shareholders and disproving the arguments laid out here. But in contrast to its highly reliable growth in the past, now is a time of great uncertainty, and that’s why you shouldn’t buy the stock until at least some of the uncertainty is resolved.