I remember the days when you could buy a book called a “calorie counter” that listed all the foods with calorie amounts. You’d just add up what you ate, make sure it fell below a certain amount and that was your key to losing weight. Maybe taking your pulse when you did exercise could be an addition to the regiment. Perhaps you might even count how many footsteps you took on your walk. In those days, who needed Fitbit Inc (NYSE:FIT)?
In fact, today who needs a Fitbit? I say that very few people need it, even less actually want it and even fewer end up living life by it in the long-term.
Which may explain why Fitbit stock is cratering. As I’ve said before, FIT doesn’t solve a problem and therefore it could never be a sustainable business. If it isn’t a sustainable business, Fitbit stock will never sustain a higher price.
That does not mean, however, that it isn’t good for a trade. In fact, I think it just might be tradeable here at $8.10 in the near-term.
What Makes Fitbit Stock a Good Trade?
For the naysayers, let me just point some things out. In Q3, the bottom line collapsed 43% to $26.1 million. For the first nine months, the bottom line was shaved by almost 65%, down to $43.5 million. This came despite an almost 11% increase in devices sold and a 23% revenue increase.
Why were the bottom line numbers so lousy, then? Expenses. FIT stock is beholden to the expense side of the equation, particularly marketing. It has to constantly upgrade and improve its products to keep users engaged. Thus, when you drill into the numbers, you find an almost 150% increase in the research and development budget. Those new products have to be advertised, so those costs saw a 70% pop. That doesn’t even include general and administrative expenses.
This is going to be life for Fitbit stock and the company. Look at the products on its home page. They are mostly just different versions of the same thing, and that thing does not really solve a problem. Only a very small and dedicated user base is going to fuel the company’s ongoing cash flow, and while new people will give the products a try from one year to the next, most people will not use the products for very long.
Why?
Because a FIT product means commitment to a lifestyle change. Few people actually do that. Many try to lose weight via diets. Most diets fail. Many people will buy a Fitbit product as part of a diet and exercise regiment, and will lose motivation.
Because diets fail, FIT stock will fail … as an investment.
Bottom Line on FIT Stock
However, I don’t see this as a clear shorting opportunity because getting to zero isn’t going to happen. Fitbit stock has $672 million in cash with no long-term debt, which comes to about $2.80 per share. So back that out of the current price and the business sells for $5.30 per share. With 243 million shares outstanding, the business is thus valued at roughly $1.3 billion. This is just about its all-time low.
Now, with expected fiscal year income of about $135 million, FIT stock trades at only 10x earnings and about 0.5x sales. However, operating cash flow fell to $40 million in the first nine months from $125 million, and Fitbit stock is now running negative free cash flow. Thus, FIT stock remains arguably overvalued, even at this level.
But, with its cash position, there may be some degree of support. I think you could nibble here on the long side, and nibble down to about $6.40 or so. However, I would set a stop loss at around $6.25. If Fitbit stock continues to fall, and especially if there is a large market correction, it could go much lower. So be nimble and get ready to get out.
On a recovery, however, if FIT stock bumps up against the 50-day moving average (currently at $9.29), that’s where you want to sell out.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
