What a brutal six months it’s been for Tandem Diabetes. The stock has dropped 39% and now trades at $20.61, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Tandem Diabetes, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Tandem Diabetes Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Tandem Diabetes. Here are three reasons why we avoid 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 17,100 in the latest quarter, and over the last two years, averaged 1.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Tandem Diabetes’s earnings losses deepened over the last five years as its EPS dropped 42.6% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Tandem Diabetes’s low margin of safety could leave its stock price susceptible to large downswings.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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 burned through $3.80 million of cash over the last year, and its $435.4 million of debt exceeds the $368.6 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Tandem Diabetes’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Tandem Diabetes until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Tandem Diabetes doesn’t pass our quality test. Following the recent decline, the stock trades at 34.6× forward EV-to-EBITDA (or $20.61 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Tandem Diabetes
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