So far this year, shares of fitness tracking device maker Fitbit Inc (NYSE:FIT) have fallen more than 70%, but investors shouldn’t rush out to pick up the beaten down company. It hasn’t bottomed out just yet.
Fitbit stock is likely to make its way even lower in the coming months as it struggles though the all-important holiday quarter and works to improve growth overseas.
The wearables company is facing several significant headwinds at the moment and investors would be wise to avoid Fitbit stock until there is better evidence of a turnaround.
Fitbit’s most recent earnings report sent the stock lower as investors worried about the firm’s disappointing fourth-quarter guidance. The company’s results, however, did have a silver lining: Revenue gained 23% from a year earlier, suggesting that the company was able to compete with some of its more well-established peers.
So What’s The Problem?
While the revenue boost does look promising, the real issue for Fitbit stock was the company’s fourth-quarter guidance. Management downgraded its full-year growth to between 25% and 26%, and Q4 revenue is only expected to rise by around 2%.
Those figures make it look like demand for Fitbit devices isn’t quite as rosy as previous quarters have made it out to be. This is a big problem for investors, because it suggests that Fitbit will struggle throughout the holiday shopping season — a time when electronics makers are supposed to shine.
Fitbit has seen device sales start to slow in North America, and although the introduction of pricier versions have helped keep revenue figures afloat, the trend is worrying.
Not only is Fitbit struggling to sell its products, it has become much more expensive for the company to get them off the shelves as well. R&D costs and marketing spend have all marched steadily higher as the company works to expand.
While this doesn’t necessarily spell disaster for FIT shares, it will likely keep profitability down in the coming quarters and could keep Fitbit stock trading lower until those costs are adequately balanced out.
Expansion Abroad and Competition
One of the most appealing prospects for Fitbit is the company’s expansion into Asia. China, Korea and Japan represent a huge untapped market for the wearables industry, and FIT appeared to be poised to make a move in the region earlier this year when it inked a deal to sell its products through Alibaba Group Holding Ltd (NYSE:BABA).
However, management revealed that it’s been much harder than anticipated to break into the Asian market — something that contributed to Fitbit’s weaker-than-expected full-year guidance.
Not only is Fitbit dealing with growing pains of its own, but the company is also under a great deal of pressure from competition in an increasingly crowded industry. Many point to Apple Inc.’s (NASDAQ:AAPL) second-generation watch as evidence that the behemoth tech company is going to put FIT out of business.
While the public’s response to the Apple Watch has been muted, the second-generation device’s focus on fitness tracking means that the company, whose brand loyalty and recognition is unparalleled, is becoming more and more of a threat to Fitbit.
Bottom Line on FIT Stock
FIT stock isn’t all doom and gloom. For one thing, the firm’s share price has fallen more than 70% since its initial public offering, so it is getting closer to having a realistic valuation.
The company also has simplicity on its side: there’s a market out there, after all, for a simple fitness tracker that doesn’t cost as much as fancier products like the Apple Watch. Fitbit could very well be a good buy if the company is able to continue expanding into new markets, but right now the company’s growth strategy is very unconvincing.
Things at Fitbit appear to be shaky and investors would be wise to avoid Fitbit stock until the company has gotten itself back on its feet.
As of this writing, Laura Hoy was long AAPL.
