Fitbit Inc (FIT) Stock Is a Zombie, But the Cure Is Coming

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My preconceived notion when putting this piece together was that demand for Fitbit Inc’s (NYSE:FIT) wearable fitness devices and accessories have peaked for good and that Fitbit stock, which was down sharply throughout most of 2016, had little investment appeal. Yet sales should be up this year, and FIT is optimistic for its sales levels during this all-important holiday season.

Fitbit Inc (FIT) Stock Is a Zombie, But the Cure Is Coming

It also seems logical that consumers will eventually ditch wearable devices and turn to apps in their mobile devices.

In theory, Apple Inc. (NASDAQ:AAPL) should be able to put Fitbit out of business. Yet, there appears to be a select group that is interested in daily fitness, and athletes will likely always be interested in any information that helps them perform best and compete at a high level.

Is It All Bad News for Fitbit Stock?

FIT is also developing products for what it terms a healthcare ecosystem. In its words, it aims to “comprehensively monitor and effectively engage patients and consumers to drive better health outcomes.” Health and fitness tracking is likely to remain as important as ever, and could develop into a multi-billion dollar business for wearable device firms such as FIT.

Cash flow trends aren’t encouraging at all. In 2016 (through Sept. 30), Fitbit has been a net spender of its cash. By this period in 2015, it had generated $125.5 million in operating cash flow and only spent $17.7 million on capital expenditure. This year operating cash flow only totaled $40.2 million and capex had grown to $66.8 million, meaning negative free cash flow.

Yet management expects a healthy holiday season to bring in sales and profits and boost total cash on hand from about $672 million currently to between $900 million and $950 million by the end of the first quarter of 2017. This is when all the cash will come in from the holiday sales. That could bring total cash to nearly $4 per diluted share, or just over half of the current share price of $7.95 per share.

For the full year, sales are expected to grow as much as 26% to $2.3 billion. This is based off the 20 analysts currently following Fitbit stock. This group expects a modest 3% boost to $2.4 billion during 2017, but that is subject to change. Earnings estimates for FIT stock are at $0.58 per share this year, and $0.66 next year.

The problem with earnings is forecasts have come down significantly. Just 90 days ago, analysts expected earnings of well over $1 per share for each of the next two years. Based on the decreases, there is little surprise Fitbit stock has fallen from $30 per share to the single-digit level currently.

It remains to be seen if Apple, or Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android platform will develop apps that increasingly compete with Fitbit’s wearable devices. It is clearly more convenient to carry one device over two, though highly active people don’t probably carry a phone while working out. Yet, more advanced data from wearable fitness devices could grow much more specialized than what a phone can provide.

With FIT stock’s current price and valuation (less than 13x earnings estimates), because of the share-price fall, the company’s investment picture is now quite interesting. It has no long-term debt, so it is in a great financial position. Fitbit stock is still generating cash flow and profits. In its recent earnings call, management touted that it has sold 28 million devices since going public and $2.7 billion in sales.

FIT also mentioned, “healthcare and insurance industries are starting to embrace our products and services.” To me, this is the real potential in Fitbit stock. Earlier in December, FIT and medical device giant Medtronic PLC (NYSE:MDT) announced a partnership to track the glucose levels of patients with diabetes. Medtronic’s iPro2 CGM device will integrate data from Fitbit’s activity devices.

The Bottom Line on FIT Stock

Of course, it is going to take time for any tangible results from the healthcare and insurance initiatives to take hold. For the time being, consumer demand for Fitbit devices appears to be tepid at best.  Management is working through some higher inventory levels, and it appears that existing sales are much less profitable than they were several years ago for FIT stock.

For now, Fitbit stock investors might want to wait for the sales results from Black Friday, the Christmas shopping season and the promotional period following the holidays. However the share price is low, and there aren’t really any ambitious growth levels baked into FIT stock.

It might not be a bad strategy to nibble into Fitbit stock at current levels, and average in if sales come in weak from the holidays and the share price falls any further. But regardless of the short-term strategy, an investment in FIT stock will require a long-term perspective, to see if it is able to profitability deliver on its mission of helping “people lead healthier lives by empowering them with data, inspiration and guidance.”

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

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