Over the past six months, Tandem Diabetes has been a great trade, beating the S&P 500 by 9.6%. Its stock price has climbed to $19.83, representing a healthy 17.8% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Tandem Diabetes, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Tandem Diabetes Will Underperform?
Despite the momentum, we're cautious about Tandem Diabetes. Here are three reasons you should be careful with TNDM and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Healthcare Technology for Patients company because there’s a ceiling to what customers will pay.
Tandem Diabetes’s pump shipments came in at 20,000 in the latest quarter, and over the last two years, averaged 4.4% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Tandem Diabetes’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Restricted Access to Capital Increases Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Tandem Diabetes posted negative $76.74 million of EBITDA over the last 12 months, and its $449.3 million of debt exceeds the $319.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Tandem Diabetes if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Tandem Diabetes can improve its profitability and remain cautious until then.
Final Judgment
We cheer for all companies helping people live better, but in the case of Tandem Diabetes, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 29.9× forward EV-to-EBITDA (or $19.83 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward our favorite semiconductor picks and shovels play.
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