Fitbit Inc (FIT) stock is getting slammed during Tuesday trading, with shares down more than 6% just before its first-quarter earnings report, which is set to come out after the bell on Wednesday.
Is the selloff justified? Tough to say.
If past earnings reactions are any indication, it would seem that the market is trying to get ahead of itself before bad turns to worse: Previous earnings reports have sparked almost universally negative reactions on Wall Street.
I, however, still think FIT stock is worth consideration, especially at this level. Fitbit shares trade at just 12 times forward earnings and about a 0.8 price/earnings to growth ratio. Famed growth investor Peter Lynch hailed a sub-1 PEG ratio as a typical indicator of an undervalued stock.
Let’s take a look at what analysts expect from FIT stock on Wednesday afternoon, and think about how obtainable those results are.
FIT Stock: Is Surging Growth Enough?
Investors have punished FIT stock since its IPO nearly a year ago. After its IPO at $20 a share last June, shares took off, soaring northwards of $50 … only to come plunging back to earth again, falling to lows below $12 per share.
Sure, maybe Fitbit stock was overvalued at $50, but the fact of the matter is the wearable technology leader hasn’t posted a disappointing quarter since it hit the markets. In fact, it has beaten on revenue and earnings per share every time.
The concerns have been more about Fitbit’s competitors, guidance and shrinking margins. Apple Inc.‘s (AAPL) Apple Watch is definitely the most frequently cited threat to FIT stock, but the truth of the matter is, Apple Watch sales have been definitively underwhelming. Plus, Fitbit products sell at substantially lower price points than the Apple Watch.
Here’s what Wall Street is expecting from Fitbit in the first quarter: Revenue of $443.24 million, up 31.6% year-over-year, on earnings per share of 2 cents, down dramatically from the 28 cents it earned a year ago.
I tend to believe that FIT stock will beat those marks — and handily — when it reports on Wednesday. It has a history of doing so, and CEO James Park once told a reporter his philosophy was to “never have a bad quarter.” Whether that means conservative guidance or operational excellence is open to interpretation.
Enough with the qualitative reasons, let’s look at the numbers. I just find it really hard to believe that Fitbit sales are going to go from jumping 92% in the fourth quarter to a mere 31% in the first quarter of 2016. That 31% growth figure looks especially low in light of the recent releases of the Fitbit Blaze and Fitbit Alta, both of which were selling well through the end of March.
The company’s confirmation that sales of the Blaze and Alta models were coming along nicely has helped a recent resurgence in the share price, which has roared roughly 15% higher in the last month.
Of course, the question on everyone’s mind is guidance. But after lowering guidance last quarter, I doubt Fitbit will reduce guidance again, especially in light of the strong early sales of its new devices. I’m bullish on FIT stock ahead of Wednesday’s earnings release.
As of this writing, John Divine was long FIT stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
