Fitbit (FIT) stock has been one of the hottest new issues on the market for much of the summer; in less than two months, FIT stock rallied from its IPO price of $20 per share to above $50 per share, good for 150% gains.
But after touching all-time highs yesterday, the wearable fitness device company faced its first major test as a publicly traded company: its second-quarter earnings report, which was released Wednesday afternoon.
Judging by the market reaction — FIT stock initially leaped in after-hours trading before plunging as much as 13% — you’d think Fitbit earnings had totally missed the mark.
Not the case.
Fitbit actually reported a remarkable quarter, crushing consensus expectations for both revenue and profits. FIT earned an adjusted 21 cents per share of FIT stock in Q2, up more than 130% from the 9 cents per share it made in the year-ago quarter, and well above Wall Street’s 8-cent estimate. Revenue soared by more than 250%, coming in at $400 million vs. estimates for $319 million.
So why, then, is the FIT stock price in the gutter on Thursday?
Margins were the major concern, as non-GAAP gross margins contracted from 52% to 47%. Foreign exchange headwinds, a lower-margin product mix and cost increases related to building out production capacities were several reasons for the contraction.
Regardless, I think anyone selling FIT stock due to margin concerns is forgetting one thing: Fitbit’s margins are really, really good. To put it in context, Fitbit’s 47% gross margin is a full 7 percentage points better than Apple (AAPL), which clocks in at 40%.
Speaking of Apple, people bearish on FIT stock will often cite AAPL as a direct competitor to Fitbit, subtly insinuating the tech giant could crush the fast-growing wearables company in the blink of an eye. In reality, the high-priced Apple Watch doesn’t target the mass markets like Fitbit devices do. Not to mention the fact that the Apple Watch has been a commercial failure and huge disappointment.
In any case, the market is overreacting to yesterday’s report. InvestorPlace.com Executive Editor Jeff Reeves talks with me about the quarter and why FIT stock is still a buy in the video below:
https://www.youtube.com/watch?v=xOssD2hTgiA
As of this writing, John Divine was long both FIT stock and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
