This Top Diabetes Stock Just Extended Its Lead

Source: Dexcom's G5 Mobile System.

Investors in red-hot diabetes growth stock Dexcom Inc. got some good news earlier in the week, as the company announced that the FDA has given the green light to the company's new G5 Mobile Continuous Glucose Monitoring, or CGM, system.

This new system allows for the small glucose sensor that's worn on the body to communicate with an iPhone via a Bluetooth connection, eliminating the need to carry around a separate receiver. The company expects the system to be Android compatible next year.

Shipments are set to begin at the end of September, and the company is giving patients who purchased its previous G4 system after Aug. 1 a free upgrade. Longer-term Dexcom users will also be allowed to upgrade, but they'll pay a fee that's yet to be determined.

Parents of small children with diabetes should welcome this news, as children as young as 2 can safely use a CGM. Having diabetes already requires carrying around an insulin pen, glucose tablets, a blood-sugar monitor, and more, and being able to eliminate one of the required components should be a relief. Even better, with the option to have data transmitted to an Internet-connected smartphone, up to five people can to receive real-time glucose information and alerts, which can be a big help for parents who send their kids off to school or daycare.

Source: Dexcom.

For Dexcom investors, this advancement is poised to ramp up the convenience of using a CGM system, and it could go a long way in helping to persuade patients who have thus far resisted the technology to finally try it.

This announcement probably sent a shiver down the spines of executives in Medtronic'sdiabetes division, as providers and patients have already viewed Medtronic's CGM products as inferior to Dexcom's. In an effort to catch up in the CGM race, Medtronic earlier this year announced its own cloud-enabled device,which looks useful enough butrequires patients to carry an extra uploader at all times in addition to the sensor and pump, making the system require more parts than Dexcom's. Dexcom has long had the advantage from an accuracy perspective, and its new G5 only looks to extend that lead.

Is Dexcom a buy?More than 29 million Americans have been diagnosed with diabetes, a disease that throws blood sugar out of control, potentially leading to a huge range of short- and long-term complications. Continuous glucose monitoring systems such as Dexcom's have been a huge step forward for patients seeking to better control their glucose, as the real-time sensing data helps patients take action before they have a problem.

I'm a firm believer that Dexcom is the leader in the continuous glucose monitoring space, and the company continues to stare down a huge market opportunity. However, Wall Street is also aware of Dexcom's prospects and competitive position. The company continues to trade at a huge premium -- currently north of 22 times sales.

The G5 announcement has a great chance of helping the company accelerate its already torrid growth rate, which could allow the stock to continue its market-beating ways from today's nosebleed valuation. However, as bullish as I am on the company's competitive position in the market and its huge opportunity ahead, its stock is simply far too richly valued for my taste. Until the company trades at a more reasonable valuation, I'm content to keep my distance from the stock and will continue to root from the sidelines for this diabetes winner to keep on advancing.

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Brian Feroldi has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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