Why Fitbit Inc (FIT) Stock May Never Be Able to Recover

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Fitbit stock - Why Fitbit Inc (FIT) Stock May Never Be Able to Recover

Source: Fitbit

The tech hardware business is brutal. A successful company needs tremendous scale, ongoing innovation and competitive pricing. The problem is that many hardware companies cannot keep up the momentum. Just look at Palm, Nokia Corp (ADR) (NYSE:NOK) and BlackBerry Ltd (NASDAQ:BBRY).

Why Fitbit Inc (FIT) Stock May Never Be Able to Recover

One of the latest that looks poised to join the group is Fitbit Inc (NYSE:FIT). Founded in 2007, the company pioneered the wearables space, by introducing cutting-edge activity trackers. And from the start, Fitbit stock growth was strong.

But the momentum hit a wall last year, and so did FIT stock, plunging from $30 to $5.50. Unfortunately, going into this year, the hemorrhaging hasn’t stopped. Fitbit stock has gone on to lose an additional 25%.

The real show stopper was the all-important Q4. Revenues plunged by 19.4% to $574 million and the net loss came to a hefty $146.3 million.

Yet it appears that the deceleration will not stop — at least for 2017. The forecast is for revenues to range from $1.5 billion to $1.7 billion and for the negative cash flow to be between $50 million to $100 million. This implies that the top line could drop 22% to 31%.

To put things into perspective, Fitbit stock posted a sizzling 150% spike in revenues in 2015.

The Silver Lining for FIT Stock

It’s true that Fitbit stock trades at a dirt-cheap valuation. Note that the price-to-sales ratio is at a mere 0.57X. When you strip out the cash balance of $706 million, the market value of FIT stock is at only $564 million.

So what’s the company’s turnaround plan? It’s actually a bit fuzzy. If anything, the measures appear to be cosmetic. For example, there were layoffs of only about 6% of the workforce. But then again, the company has been on a hiring binge for the last few years, and the recent acquisitions of Pebble, Vector Watch and Coin will likely add to the headcount.

Then there is the potential for Fitbit stock to make a play for the smartwatch market. While there are synergies with the existing business, the move would be fraught with risks. Let’s face it, the mighty Apple Inc. (NASDAQ:AAPL) has been pouring tremendous resources into its Watch offering. The company also has the advantages of a global distribution network and a powerful ecosystem of developers and partners.

However, FIT’s efforts in the health and wellness market may ultimately be the right strategy. One encouraging deal is with Medtronic, which involves the development of glucose monitors for those with diabetes. Then there is the health insurance market, as seen with the partnership with UnitedHealth Group Inc (NYSE:UNH).

But it is important to keep in mind that the impact on FIT stock will likely take a few years because of the rigorous compliance process.

Bottom Line on Fitbit Stock

Even though FIT makes great products and has a large user base, this may not be enough. The nagging issue is that the market has quickly turned on the company. First of all, there appears to be saturation — at least in the US — with a multitude of devices from large players like AAPL, Garmin Ltd. (NASDAQ:GRMN), Samsung (OTCMKTS:SSNLF) and Microsoft Corporation (NASDAQ:MSFT) as well as many low-cost operators.

Next, it looks like FIT’s addressable target market may be more of a niche. For example, while the company has 50 million registered devices, there are only 23 million active users. Something else that is concerning: Less than 1% of overall revenues come from the premium subscription service.

So do you think this is anywhere near, say, the case for the iPhone? Of course not. For the most part, the iPhone is something that is a must-have for most customers. A Fitbit device, on the other hand, is really a nice-to-have.

No doubt, as the company’s CEO James Park recently noted, this year is about making a “transition.” And he’s right, which means it’s probably best to wait on Fitbit stock until other initiatives, like the investments in healthcare, start to show some traction.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A BundleFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/fitbit-inc-fit-stock-never-recover/.

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