Owners of Fitbit (FIT) stock will want to enjoy the post-IPO rally while it lasts, because it won’t forever.
They never do.
In fact, the peak for Fitbit stock may be within sight, so wise investors may want to go ahead and start thinking about an exit strategy now.
Yes, this undoubtedly will be an unpopular stance regarding one of Wall Street’s newest darlings (the Fitbit IPO only took place on June 18). But, the truth is the truth, even if it’s a tough truth for current and prospective owners of Fitbit stock.
Fitbit Stock Lauded
The notion that it might be time to think about an exit of FIT shares flies right in the face of today’s news. That is, RW Baird analyst William Power initiated coverage of Fitbit stock today, deeming it an “outperform” and providing an initial price target of $52 per share — more than 22% higher than the current price even after today’s 5% gain.
Power noted:
“Our proprietary fitness band survey and other retail channel checks suggest strong ongoing sales momentum. While valuation has gotten stretched following strength since the IPO, we believe estimates could prove conservative and expect operating momentum to push the shares higher.”
Fair enough. There’s no denying that Fitbit’s fitness trackers have been a hot product, and the company has been cheered all throughout its growth leading up to last month’s IPO.
On the other hand, time and time again we’ve seen IPOs eventually tank — not because they were horrible companies, but simply because the stock was completely disconnected from any semblance of corporate value and allowed to fly untethered.
It’s unlikely Fitbit stock is an exception to that norm.
Reality Strikes
Not that anybody doesn’t innately know it, but every new stock at one point in its history — usually not too long after its IPO — has to go through serious growing pains in the form of a steep pullback. It’s just the nature of the beast.
See, a successful IPO hinges on a company putting its best foot forward to raise the maximum amount of money by issuing the minimum number of shares. Once the initial public offering is completed, real results supplant the story of hope.
Current holders of Fitbit stock don’t have to look too far back in time to find multiple examples of this reality.
Take GoDaddy (GDDY) as an example. The stock rallied nicely from its April 1 IPO, moving to a peak of $33 (versus an IPO price of $20 per share) on June 19. Since then, GDDY has fallen 17% to current prices just above $27.
GoPro (GPRO) is another — and perhaps more relevant — example of what may well end up happening to FIT stock.
GoPro, the maker of wearable action cameras, was a smashing success right out of the gate. After issuing at an IPO price of $24 per share in June 2014, GPRO spent the next four months marching to a high of $98.47. It spent the next five months falling back to a low of $37.13. Although GoPro has rebounded a bit since then, the current price of $52 per share is still miles away from the peak price paid back in October by some confident investors — investors who were sure GoPro could do no wrong.
And therein lies the biggest concern for holders of Fitbit stock at this time: The rhetoric surrounding GoPro a year ago was just as bullish as the rhetoric surrounding FIT stock is now. The company has its merits, to be sure, but the echoes of the bullish story spun for the purpose of the Fitbit IPO are still ringing.
Etsy (ETSY), Wingstop (WING) and Axovant Sciences (AXON) are just a few other recent examples of IPOs that were initially heralded, only to end up doling out pain to those who bought into the hype.
Bottom Line for FIT Stock
To be crystal clear, an assumption that Fitbit stock is setting up for an eventual tumble isn’t a judgment call on the company. Fitbit makes a fine product that’s clearly marketable. It’s a judgment call on FIT shares, which may or may not be a measure of the company’s trailing and future results.
That disconnect is a two-way street, and can work for a stock as easily as it works against a stock. But as long as the disconnect exists (as it presently does for FIT here in the shadow of the Fitbit IPO), there is no “investing” in the company. Dabbling in FIT stock is tantamount to playing musical chairs — most people will end up without a chair before the game is over. It’s just a question of when.
The good news is, a steep tumble from Fitbit stock is also apt to reconnect its price with its actual value.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
