Fitbit Stock Has More Short-Term Upside Ahead (FIT)

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From LinkedIn (LNKD) to Etsy (ETSY), investors have seen no shortage of momentum stocks producing short-term stock gains of 50% or more following significant losses after an IPO.

Fitbit stock (FIT) is the latest to join this list. However, it might be one of the few that keeps going higher beyond this short-term pop.

To explain the trend that Fitbit currently finds itself in, take a look at the table below. What you’ll see is a collection of rather speculative companies, momentum stocks with rapid growth that each saw its stock sink significantly lower after its IPO, only to rally in excess of 50% thereafter.

As you can see by the dates and stock prices, this trend has been fairly consistent over the last four years.

fitbit-stock-momentum

These are just a handful of the many companies to follow this pattern. Given the long lasting nature of this trend, investors must acknowledge that it is more than a coincidence, occurring in overvalued, high-beta, often heavily shorted stocks.

In my research service, Tipping the Scale, I told members on Sept. 7 that Fitbit would be the next to follow this pattern, and that members should watch for Fitbit stock to bottom and then reverse soon. When I made that call, FIT was trading around $31.50. Fitbit stock has since bounced to $40, a gain of nearly 27%.

Fitbit Stock Won’t Slow Down

That said, if history is any indication of the future then FIT has a good chance to keep going higher in the days ahead, potentially topping $47 until it trades more than 50% off its post-IPO low. Beyond that, it’s quite difficult to say what happens next. Some stocks to follow this trend like LinkedIn, Pandora and Facebook (FB) have held up nicely. Others like Renren, Yelp, and Groupon have struggled mightily.

In other words, after this trend has run its course, fundamentals and a company’s valuation will dictate its future performance. With Fitbit stock, I think it has a good chance to keep going higher, or at least maintain its newfound gains.

FIT increased revenue 250% to $400 million and managed to produce a double-digit operating margin in its last quarter. While these numbers are impressive on their own, investors should remember that Fitbit achieved these results the same quarter as Apple’s (AAPL) Apple Watch launch. That’s outstanding.

Furthermore, Fitbit isn’t expecting growth to slow, which bodes well for Fitbit stock. The company is now guiding for revenue of $1.65 billion for a growth rate of 120% year-over-year. While a 120% growth rate may look mediocre for a company that just grew 250% in a single quarter, that guidance was approximately $250 million above analyst expectations.

Nonetheless, I think the wearables market is more than large enough for basic technology from Fitbit and smart technology from the likes of Apple. According to research from Slice, the Apple Watch’s weekly buying volume has declined from 200,000 in its launch week to just 20,000 now, a whopping 90% decline. Therefore, if FIT could weather the Apple storm during the second quarter, I think it can continue throughout this year and into next.

Assuming that Fitbit’s operating margin of 22% is sustainable and Fit is successful at reaching $1.65 billion in revenue, then Fitbit stock trades at just 22 times this year’s operating income. For a company that’s growing so fast, such a multiple is fair, and implies that FIT is a good long-term investment beyond any short-term gains it might create.

As of this writing, Brian Nichols was long AAPL and FIT.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/fitbit-stock-short-term-upside/.

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