Oops! This didn’t go as thought.
Fitbit Inc (FIT) announced its much-speculated fourth-quarter and fiscal year 2015 financial figures on Monday. By most standards, it was an impressive report.
In my pre-earnings analysis of Fitbit stock, I discussed how FIT was likely to smash both revenue and earnings expectations on impressive holiday results.
That was exactly what happened. In fact, CEO James Park started off his earnings call by saying, “Fitbit had an outstanding holiday season to finish remarkable year of operating and financial results.”
Revenue for FY2015 clocked in at $1.86 billion, 149% more than 2014’s $745.4 million. FY2015 non-GAAP earnings came in at $1.07 per share, bettering 2014’s 56 cents. Analysts expected earnings of $1 a share on revenue of $1.8 billion. Just as with FY 2015 figures, Q4 results outran expectations.
Now to the part that didn’t go as planned. I predicted that the earnings should be a catalyst for a Fitbit stock rally. In fact, that was quite the expectation among CFD traders, with many of them going bullish on Fitbit prior to earnings.
Turned out that the market reacted to weak Q1 guidance instead, sending the stock down about 20% in Tuesday’s morning trading. The market isn’t happy with Fitbit’s projection to make between $420 and $440 million in the first quarter, well below estimates for $485 million. However, the market is ignoring the 30% potential revenue growth that Fitbit projects for the full year.
The fear is that competition is catching up fast, which is a valid worry. But there was one big takeaway from the report that should put investors at ease.
The Real Catalyst Behind Fitbit Stock
I ran a quick search through call transcripts to see how many times the world health appeared vs. tech. I was quite surprised, considering that FIT stock is classified as a tech stock. During the Q4 and FY15 earnings call, the word tech/technology was mentioned 13 times in total vs. 40 mentions for health.
Here’s why this should matter. Fitbit stock has had a rough go of it in the market, as the market fears the wearables industry is at risk of commoditization. GoPro’s (GPRO) recent issues have been fueling this.
But the thing is, being an action camera manufacturer, GoPro is 100% a tech company. As for Fitbit, though, it only uses tech to deliver health services. In fact, CEO Park said Fitbit is growing to become a company that uses “powerful technologies to help people lead healthier lives, reduce healthcare costs and broaden the reach of our healthcare system.”
Being a health company delivering services through tech means that the fear of commoditization is overblown. Unlike GoPro, whose products are mainly for entertainment, Fitbit’s business deals with issues like obesity. And when you’re speaking about anything health-related, results matter. Therefore, as long as Fitbit continues to deliver favorable results, it’ll remain in business.
Moreover, we get more insight into the company’s wellness program, and this buttresses just how much more firmly rooted in health than tech Fitbit stock really is.
In Indiana University, which participates in the wellness program, 40% of participants decreased their body mass index, while 60% of participants dealing with diabetes saw a decrease in hemoglobin A1C levels, CEO Park said during the call. That’s not tech jargon. They’re health terms.
The Verdict on FIT Stock
As long as Fitbit remains innovative, it should have the first-mover advantage tip in its favor over the long haul. Because, as it is in the healthcare space, once people see health benefits from a product, they hardly switch.
In addition to its corporate wellness program, if Fitbit can come up with different programs to offer value to customers, the chances are high that the company is here to stay.
It’s still early days, however, and the risk of investing in Fitbit stock is high, since these points are still mostly speculative. The signs so far, however, are positive. And the clarification offered above should ease talks of Fitbit’s wearables being just a fad.
For investors who can stomach the risk, FIT offers a favorable risk/reward asymmetry.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
