March was a great month for Fitbit Inc (FIT): after management announced that the company shipped 2 million fitness watches in three weeks last quarter, share prices lurched skyward over 24%.
Previously, investors seemed to have turned their back on the stock after widespread concerns that FIT would lose sales to devices like Apple Inc.‘s (AAPL) Apple Watch. But now that those fears have begun to dissipate and sales numbers are more impressive than ever.
Does this mean FIT has reinvigorated its long-term potential?
The launches of Blaze and Alta, the company’s two newest fitness devices, have already guaranteed that the first quarter of 2016 was at least as good as the first quarter of 2015 in terms of overall sales.
Anything the legacy product line adds on top of that is just a bonus — and it might add up to quite a bit before FIT reports earnings again. The fitness bands alone, not counting the watches that only hit stores on March 9, were still a $400 million business last fall.
I think that’s worth emphasizing: Even at two years into their commercial cycle, when a normal consumer device would be showing signs of exhaustion, the “old” generation of FIT bands (Flex, Charge and especially Surge) sold out in the holiday quarter and sustained a $400 million sales stream in normal seasons.
So, no, I don’t think that FIT has gone over a cliff.
New Life for FIT Stock?
The new generation of products is off to a great start, too, but we have to wait and see what retail reorders look like to make sure that the strong initial launch builds into a longer ramp. It’s possible that those bands will get dusty on store shelves, so it’s a good idea to wait a month or so before making any long-term bets.
That long-term narrative really depends on whether AAPL is as big of a threat as investors once thought. Fortunately for FIT, last quarter doesn’t give us any indication that’s the case.
The old generation of FIT bands and the Apple Watch operate in different retail categories: You don’t include FIT in any discussions of smart watch market share for the same reason you don’t see Apple Watches sold in sporting goods stores.
And even if we were to compare apples to oranges, FIT has been winning overall wearable market share hands down, as its 8.2 million devices sold last quarter beats every formal smart watch manufacturer put together.
Still, analysts on the Street have barely budged their revenue targets for the company. The models are almost exactly where they were in early January before FIT even announced Blaze was coming. So if Blaze can continue its scorching run, it’s going to have an unexpected material impact … possibly a big one.
One million units sold is already an extremely encouraging sign, enough to add 8% to the company’s full-year revenue in less than a month. Plus, the fitness band side of the business still looks like it’s soldiering on with at least 25% to 30% sales growth a year for the current product generation.
A quarter from now, analysts see earnings-per-share growth back on a 54% forward curve, and according to some metrics, that growth and the anticipated profit stream could argue for this being a $65 stock at that point. In other words, the robust franchise FIT has evolved into what looks like a smoking bargain at its current prices.
But before FIT can make a significant rebound, investor sentiment needs to recover, and we still have to see how the new product launches play out over a moderate time frame. After that, Wall Street can reanalyze, and maybe then the optimistic outlook for this stock will become a bit more definite.
EDITOR’S NOTE: This story has been clarified to refer to the Alta and Blaze as “devices,” collectively,” as the Alta is not a watch.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
