1 Spectacular Growth Stock Down 20% to Buy Right Now, According to Wall Street

Since last year, DexCom (NASDAQ: DXCM) has faced a series of issues that have sunk its stock price. The medical device specialist's shares are down 20% over the trailing-12-month period and are barely above their 52-week low.

Is there any hope for a turnaround? Wall Street certainly thinks so. DexCom's average price target of $87 (according to Yahoo! Finance) represents a potentially sizable upside of about 58% from its current levels. Why are analysts on The Street bullish on the stock, and is their optimism justified?

What went wrong for DexCom?

DexCom develops and sells continuous glucose monitoring (CGM) devices for patients with diabetes. Last year's rollout of one of its latest devices, the G7, led to higher rebate eligibility than the company expected, lowering revenue per user and overall top-line growth. That's one problem that led to worse-than-expected financial results in 2024, though it was a temporary one.

Image source: Getty Images.

This year, DexCom is facing legal and regulatory challenges. Allegations that the company made unapproved changes to its marketed devices, including the G7 and the older G6, led to a warning letter from the U.S. Food and Drug Administration (FDA); the agency claimed that these modifications worsened the devices' glucose monitoring performance -- a dangerous, and even potentially life-threatening, issue to deal with for diabetes patients. In addition, the FDA issued a Class 1 recall for some of DexCom's CGM receivers.

In the midst of all that, several law firms filed class action lawsuits against DexCom; claims include that it falsely advertised the reliability of its CGM systems, and that its devices have malfunctioned.

Are legal issues affecting financial results?

Although these problems are somewhat overshadowing DexCom's financial performance, the company is doing pretty well in that department. In the third quarter, revenue came in at $1.2 billion, 21.6% higher than the year-ago period. DexCom seems to be slowly recovering from a revenue growth slump, and inching closer to the rates it had investors accustomed to in the past.

DXCM Revenue (Quarterly YoY Growth) data by YCharts.

The healthcare company's adjusted earnings per share (EPS) were $0.61, 35.6% higher than the year-ago period. The continued uptake of the G7 played a role in that, despite new customer starts being disrupted by the quality concerns surrounding the device. However, DexCom still estimates that it gained tens of thousands of new customers during the third quarter.

It also noted that the G7's rate of complaints -- a perpetual problem for medical device makers -- has been relatively consistent over the past two years. So, while issues with the G7 are affecting some patients, DexCom had an installed base of nearly 3 million users as of 2024 and continues to add new users. The company is a leader in the CGM field because its devices have proven among the most effective in helping diabetes patients achieve better outcomes.

Can DexCom bounce back from its woes?

In addition to the progress of the G7, DexCom noted that Stelo, another of its CGM systems, recorded over $100 million in revenue in the 12 months since its launch. Here's why this matters: Stelo is available over the counter without a prescription to patients in the U.S., and can be used by people with diabetes who aren't on insulin, or even by those with prediabetes. The Stelo significantly expanded DexCom's total addressable market, given the nearly 100 million people in the U.S. with prediabetes.

Furthermore, the company still has plenty of room to grow in the core population of diabetes patients who need insulin. DexCom estimates that there are 4.5 million such patients in the U.S. who are eligible for third-party coverage and have yet to opt for CGM devices, despite their superiority over blood glucose meters. And that's just in the U.S.; there's a vast unmet population need worldwide.

Meanwhile, DexCom has built a competitive advantage through network effects as its installed base has grown, allowing it to attract third-party diabetes device makers seeking to make their devices compatible with DexCom's. That includes insulin pens and pumps. These factors give the company significant growth prospects.

But can DexCom overcome its obstacles? My view is that the stock's short-term outlook is highly uncertain. Don't bet on it to match Wall Street's price target in the next 12 months. However, over the long run, I'd bet on the company being able to turn things around. Dealing with product recalls and complaints (or lawsuits) isn't as rare as it seems for medical device specialists.

DexCom's biggest competitor in the CGM market, Abbott Laboratories, encountered a similar problem not that long ago. And DexCom's track record and innovative streak should give investors the confidence that it can fix the quality issues with its devices. So in my view, the stock is a buy, but only for investors willing to ride out this storm and hold on to their shares for the long term.

Prosper Junior Bakiny 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 recommends the following options: long January 2027 $65 calls on DexCom and short January 2027 $75 calls on DexCom. The Motley Fool has a disclosure policy.