A fad stock is a stock that’s tied to a one-trick-pony company (that has one basic product), but catches fire among momentum investors despite having little chance of being a long-term growth business. And using that criteria, GoPro Inc (GPRO) and Fitbit Inc (FIT) both warrant some serious “fad” examination.
That’s not to say that GoPro stock or Fitbit stock will go to zero. It’s not to say that GPRO won’t be able to sustain itself over the long-term, and the same goes for FIT.
Both companies may stay in business for a very long time, and may even generate decent free cash flow.
However, it is worth worrying that neither GoPro stock nor Fitbit stock will grow in any sort of material fashion over the long-term, and they might maintain unreasonable valuations for longer than they should.
Under close examination, one of these two stocks looks like a fad. The other one … well, the other one actually has some promise.
GoPro (GPRO) Stock: Fad or For Real?
GoPro makes great products, but they only appeal to certain demographics. Once the action sports enthusiasts and film students purchased their cameras, that pretty much did it for GoPro stock, short of upgrades to newer products. The “go anywhere” camera simply doesn’t have enough everyday uses to capture a massive market, especially considering every smartphone is also a video camera.
The company’s cost of revenue skyrocketed in Q4 while revenue only grew 9%, resulting in a $34 million quarterly loss. GPRO thus had net income of $36 million in FY15, yet GoPro stock is valued at $1.71 billion, or 48 times earnings. Meanwhile, a loss is expected for FY16.
GPRO does have $480 million in cash, or $4.80 per share. So at an effective share price of $7.60, GoPro stock trades at about 21 times earnings.
That might not be unreasonable, depending on whether sales pick up. However, if they don’t, or if GRPO doesn’t somehow continually innovate and reach into new markets, it’s probably overpriced by at least a factor of 4.
Fitbit (FIT) Stock: Fad or For Real?
Fitbit is a slightly different story. FIT stock has something going for it that GPRO does not, which is that it is a tool that is perceived to assist with living a healthier life. There is never a shortage of people trying to lose weight and exercise. Unlike GPRO, whose market is limited, FIT has a potentially unlimited market. The question is whether FIT management can successfully broaden its product selection and appeal, and keep people interested in the flagship product as being something that is considered indispensible.
FIT has challenges, in that the accuracy of its devices are being scrutinized. It also warned that it will be spending more money in FY16. There’s a lot of concern and criticism of the products and company. Unlike GPRO, however, FIT saw revenue more than double in FY15 and net income almost quadruple to $114 million.
Fitbit also is generating some real free cash flow now. But of particular interest is that FIT has $664 million of cash on hand and no long term debt, which is about $3.16 per share in cash. The stock trades at $13.05, which means the market is valuing the business itself at only $9.90 per share, or $2 billion, which is 18 times FY15 net income.
Explain to me how GoPro can be trading at 21 times earnings, Netflix, Inc. (NFLX) is in triple-digit P/E territory, yet Fitbit trades at only 18x earnings.
Think about this. If FIT stock falls to $3, that means the market is literally saying the company has no value at all except for its cash. To me, that suggests Fitbit stock may be worth taking a flyer on.
Whether or not Fitbit is a fad, it is cheap enough that taking a flyer may offer some upside if it executes in any meaningful way.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
