Fitbit Inc (NYSE:FIT) just reported strong earnings, and FIT stock is soaring as a result. Not only did sales and profits beat expectations, but outlook for future Fitbit earnings are improving as well.
For FIT stock holders, this is a long overdue result. Fitbit earnings have dropped a total of five times since the company went public in 2015, and each of the first four quarterly reports resulted in big declines.
In fact, despite today’s rally, the fitness wearables company is down 55% from its first day of trading and FIT stock is down about 70% from its 52-week high.
That history is worth remembering– particularly since the results were quickly followed by a rather lackluster analyst response. Leerink Partners reiterated its “market perform” rating on FIT stock, but lowered its target price from $18 to just $16. That’s only about 10% upside from here.
The sad reality is that Fitbit has too much ground to make up, and too shaky a footing for investors to trust it here.
That’s particularly true given its disappointing plans to capitalize on the all-important holiday sales period.
FIT Stock Unfit for Holiday Success
Sure, Fitbit execs have been quick to trumpet the fact that there will be the biggest line of products ever this year after two new gadgets launch. However, it’s important to be realistic about that line — and how many retreads are in it.
And yes, according to reports,the Fitbit Alta and Blaze products drove over half of the company’s Q2 revenues and both are new products that launched in the past year. But in a call with analysts after FIT stock reported numbers this week, execs admitted these are largely “upgrades of existing products,” even though they used the term “new products” interchangeably.
That’s a big red flag, since it doesn’t show much in the way of innovation and is simply relying on customers who already trust the brand to upgrade to the newest version for a few more bells and whistles.
Furthermore, the details this quarter showed gross margins pinched again and an increase in warranty charges around its legacy products. Considering FIT stock is relaunching so many of these legacy products, that kind of uptick in charges and concern about pricing should resonate with investors.
Fitbit Inc. is undoubtedly an innovator in the space, and fitness wearables aren’t going anywhere even if competitors like Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) continue to develop their own hardware and software. However, it’s important to separate the narrative and the optimism of some investors from the reality.
This Christmas may not be kind to FIT stock. So if you’re an investor, I’d consider selling after this pop and finding a better alternative to finish the year.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
