DexCom’s Bearish Pattern And Valuation Spell Trouble
2022.04.24 08:45
Dexcom (NASDAQ:DXCM) is a glucose monitoring systems manufacturer whose sales have seen rapid growth in recent years.
The company’s products offer a convenient symbiosis between technology and medicine for people with diabetes. Meeting the needs for health and convenience is what brought Dexcom to $2.45 billion in revenue in 2021. The company’s guidance calls for 15-20% more in 2022.
The stock, however, has been a disappointment over the past six months. DXCM reached an all-time high of $658.44 a share in November, before falling under $368 by February.
That is a 44% plunge in less than four months. Even though the stock recovered to $537 earlier this month, it closed last week almost $100 a share lower.
The question investors are probably asking themselves is whether this is a buying opportunity or the beginning of a bigger selloff. We believe it is the latter for two main reasons.
DexCom Stock 4-Hr Chart
The first one has nothing to do with the company itself but with investors’ attitude towards it. The optimists’ buying and the pessimists’ selling creates repetitive price patterns with predictive value.
These patterns are the focus of our specialty—Elliott Wave analysis. Dexcom ‘s 4h chart reveals a textbook 5-3 wave cycle to the south, which should worry the bulls.
The first part of the cycle is called an impulse pattern, which is a five-wave sequence, labeled 1-2-3-4-5. The fractal nature of the markets is also manifested as the five sub-waves of wave 3 are visible, as well.
A three-wave correction in the opposite direction follows every impulse before the trend can resume. This is what the recovery to $537 stands for in the case of Dexcom stock.
It is a simple A-B-C zigzag, which seems to have ended just ahead of the 61.8% Fibonacci resistance level.
If this count is correct, last week’s weakness is not a dip to buy. It is the start of wave (3/C) whose initial targets lie under $350 a share. The problem is that it can fall much lower than that, which brings us to our second reason to stay aside.
Valuation Alone Is Enough Of A Reason To Avoid Dexcom Stock
Dexcom’s earnings are still immaterial as the company reinvests most of its profits to fuel growth, which is understandable. So its extremely high forward P/E ratio of 128 doesn’t mean much.
The problem is that its price-to-sales ratio of 14.5 is very troublesome, as well. Compare that to the current P/S for the S&P 500 index of 2.7, also historically high, and you see just how overvalued DXCM really is.
Besides, there are few things the market hates more than a decelerating sales growth and Dexcom ‘s has already fallen from over 43% in 2019 to 2022’s expected 15-20%.
A slowing growth rate coupled with a bearish Elliott Wave pattern in an extremely overvalued stock is a recipe for disastrous investment returns.
Our bet is that Dexcom’s patients will be much more satisfied than its shareholders over the next few years.
