Fitbit Inc (FIT) Stock Is Ugly as Sin, But Has a Chance for Redemption

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If there’s a candidate for biggest disappointment of 2016, Fitbit Inc (NYSE:FIT) would be more than a reasonable choice. After starting last year near the $30 mark, FIT stock endured a remarkably bad run that was briefly interrupted by bursts of positive momentum. It was at that point where I figured the selloff was overdone. Fitbit stock, after all, represented the chic wave of wearable technology.

Fitbit Inc (FIT) Stock Is Ugly as Sin, But Has a Chance for Redemption

Boy, was I ever wrong!

After those bursts came a worrisome lull — and then the hammer. On Nov. 2, FIT stock released its third quarter of fiscal year 2016 results. Although earnings for FIT matched consensus estimates, Wall Street was unhappy with the increasingly negative trend. Prior to Q3, the earnings surprise for Fitbit stock was over 123%. In Q2, it was only 10% above consensus. Achieving parity was therefore no achievement at all.

Wall Street is a town that, of course, takes no prisoners and shows no mercy. FIT stock was summarily executed the following day, hemorrhaging 34% in the markets. The good times, it appeared, were over and never to be seen again.

Dim Outlook for FIT stock

There are a number of reasons why investors abandoned ship on Fitbit stock. On the financial front, the hard numbers did not harmonize with the company’s glitzy sales pitch.

For instance, revenue growth has always been the main attraction for FIT stock. Obviously, no one buys it for its dividends. But in recent quarters, that growth slid to all-new lows as a publicly traded company. That raises concerns about whether or not FIT products are simply a fad.

The slowdown in net income is also a red flag for investors. Fitbit stock is unfortunately saddled with an ongoing liability. In order to maintain excitement in the fickle health and fitness industry, it has to pump out multiple advertisements and promotions. Inevitably, that drags on the bottom line, making FIT stock overvalued on paper. Combined with declining sales growth, prospects suddenly dimmed.

But as InvestorPlace contributors Lawrence Meyers and James Brumley wryly note, the biggest risk to Fitbit stock is the consumer. I love what Meyers has to say, so I’ll just let him say it: “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.”

As if that wasn’t enough of a gut punch, here’s what Brumley remarked: “Although smartwatches and wrist-worn fitness trackers launched with a great deal of fervor, that interest faded quickly. Once ‘the’ consumer-tech item to buy, smartwatches only appear at the top of 3% of this year’s holiday gift wish-lists.

As Jim Cramer put it a couple of weeks ago, ‘I think that everybody who wants a Fitbit has one.'” Brumley adds that competitors like Garmin Ltd. (NASDAQ:GRMN) offer cheaper alternatives.

Don’t Ignore the Upside Potential for Fitbit Stock

Truer words have never been said. At the same time, I think my fellow colleagues and the army of FIT critics are a bit misguided. We’re Americans and we’re fat — I totally get that. Every time Macy’s Inc (NYSE:M) runs a sale, I lament the fact that the only options remaining are going to be sizes well outside the middle of the bell curve.

FIT stock, fitness center PPI
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Source: Source: JYE Financial, unless otherwise indicated

Should President-elect Donald Trump “make America great again,” we will see the PPI increase not only in fitness, but in a slew of consumer sectors. When the money is flowing, people will spend, and largely on themselves. It’s just human nature — we want to look good and feel good, and exercise is an effective route to get there.

So I’m not too concerned about the relevance of FIT stock. Just because someone wants to eat Doritos all day doesn’t mean others share the same sentiment.

The FIT Hasn’t Hit the Fan Yet

It’s not the most appreciated attribute, since Wall Street can be an impatient bunch. However, I think we have to give credit where credit is due. Chief Executive James Park is the first to recognize the vulnerabilities of Fitbit stock and is doing something about it. In November, I argued that he “is transitioning the company into a ‘digital health company.’ It’s an organic move that doesn’t conflict with its core Surge products, but makes FIT stock less vulnerable to consumer whims.”

Yes, tech giants like Apple Inc. (NASDAQ:AAPL) are an organic source of competition due to the fact that their offerings can do the things that a FIT device does and so much more. But to Park, Apple is also an inspiration. In an interview with MarketWatch, the CEO discussed launching a social networking platform for FIT. Through aggregated tips, likes and feedback, users are encouraged to meet their fitness goals. Think Facebook Inc (NASDAQ:FB) but with actual utility.

The ultimate point is this — people are criticizing FIT stock for being one-dimensional, yet the company is clearly branching out. The problem obviously is that the price of Fitbit stock assumes that this is as good as it gets. I agree that shares are volatile and will be risky in the nearer-term.

But fundamentally, I still see the potential. Despite our expanding waistlines, we love our fitness gear. This blatant contradiction is what makes America so American. So don’t cross off FIT stock just yet — it may just surprise you.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/fitbit-inc-fit-stock-ugly-redemption/.

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