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With Stock Splits Underway, These 2 Beaten-Down Stocks Are Buys Now

Motley Fool - Wed Jun 29, 9:23AM CDT

Stock splits are all the rage these days, with several prominent companies resorting to this move over the past few months. Unsurprisingly, splits haven't been enough to rescue some of these companies in the market. After all, this corporate strategy does nothing to change the fundamental value of a company. And with stocks still experiencing some turmoil due to economic and geopolitical issues -- and individual corporations facing specific headwinds as well -- it's been a tough year all around.

Even with these caveats, there are brighter days ahead for some companies that recently resorted to stock splits. Let's consider two of them: DexCom(NASDAQ: DXCM) and Shopify(NYSE: SHOP).

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1. DexCom

Medical devices specialist DexCom announced a 4-for-1 stock split in March, which it completed on June 10. While the move did generate plenty of headlines for DexCom, the leader in continuous glucose monitoring (CGM) systems will need more than that to turn things around.

CGM devices allow diabetes patients to track their blood glucose levels continuously throughout the day, and DexCom is still riding the wave of greater CGM adoption. However, the company's year-over-year revenue growth rate has decreased in recent quarters. That's not what investors want to see in a growth stock, especially not in a tricky global environment in which stocks are getting hammered for anything that resembles a good reason.

Still, DexCom's prospects lie in the growth that the CGM industry will continue to experience. According to the U.S. Centers for Disease Control and Prevention (CDC), diabetes is an epidemic in the country, and it will only get worse in the coming decades.

This means innovative companies like DexCom that continue to come up with ways to help diabetes patients manage this chronic illness will be in demand. DexCom currently makes most of its sales from the G6 CGM system and accessories, but it is awaiting U.S. regulatory clearance for its next-generation product, the G7; that device has already earned regulatory clearance in Europe. The G7 knocked it out of the park in studies.

DexCom ran a clinical trial that enrolled more than 300 diabetes patients and compared over 39,000 blood-glucose level readings taken with blood glucose meters with those taken with the G7. The CGM device fell within 20% of the confirmed glucose range 93% of the time. The overall performance of the G7 in this trial proved its superiority over the G6, according to management.

The G7 will also be 60% smaller than its predecessor. DexCom is betting on this device to help it make headway in the under-penetrated U.S. CGM market as well as the international market where CGM penetration is even lower. In the first quarter, DexCom reported revenue of $628.8 million, 25% higher than the year-ago period.

The company's adjusted net income decreased slightly to $32.3 million, compared to the $32.5 million reported during the first quarter of 2021. Despite its poor performance on the market this year, DexCom's leadership in the CGM space -- coupled with the fact that the industry still boasts plenty of white space -- bode well for the future of this healthcare company.

2. Shopify

Shopify has had a challenging year as its pandemic-related tailwind ended. Also, the company reported a massive net loss per share of $11.70 in the first quarter. Shopify recorded a net income per share of $9.94 in the comparable period of the previous fiscal year. It's not too surprising, then, that investors are running for the hills despite its planned 10-for-1 stock that will take effect on June 29.

Still, things may not be as bad as they seem for Shopify. The company's red ink in the first quarter mostly had to do with $1.6 billion worth of losses related to equity investments it made in Affirm Holdings, a fintech company, and Global-e Online, an e-commerce platform. Shopify's adjusted net income for the quarter was a much more respectable $25.1 million, while its top line increased by 22% year over year to $1.2 billion. However, the adjusted earnings were still much lower than the $254.1 million that Shopify reported during the year-ago period.

Still, the e-commerce industry in which Shopify competes has a long and bright future ahead. According to some estimates, this market will expand at a compound annual growth rate of 14.7% through 2027.

It likely won't stop there as the world increasingly goes digital. Shopify provides almost everything businesses need to start online storefronts. The company's App Store boasts hundreds of applications that help merchants customize their online businesses.

The suite of complimentary services it offers arguably makes Shopify's platform sticky. Imagine having spent countless hours, not to mention plenty of money, building a perfect online store thanks to Shopify's offerings. Switching to another provider would be difficult to contemplate since it would take even more time and money -- which could be better spent attracting customers.

What does that mean for Shopify? The company should be able to continue attracting new customers while keeping many of its existing ones. And as the e-commerce platform maintains its momentum, Shopify's revenue and earnings will rise, even as it deals with near-term headwinds. While the past few months have been difficult for the tech company, it's too early to jump ship.

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Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Affirm Holdings, Inc., Global-e Online Ltd., and Shopify. The Motley Fool recommends DexCom and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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