Fitbit Inc (NYSE:FIT) at least has the sniff of a value play. Right now, FIT stock trades at a mere 0.6 times sales. By comparison, even battered GoPro Inc (NASDAQ:GPRO) trades at 1 times sales, and BlackBerry Ltd (NASDAQ:BBRY) is at 2.4.
Moreover, Fitbit stock boasts more than a cheap valuation. FIT also is the current leader in the wearables category, with unit shipments of 22.3 million last year.
The company is even fundamentally sound, with a tremendous team of engineers, a substantial distribution platform of more than 55,000 retail outlets, and even $704 million in the bank with no long-term debt.
So … you should buy FIT stock, right?
Fitbit: A Classic Bear Trap
All of these drivers at least appear to a potential opportunity in Fitbit, but at the very least, I have to continue to lean on the side of caution. Because Fitbit stock also has all of the signs of a bear trap.
The competitive landscape is fierce and well-funded. It’s not just specialists like Garmin Ltd. (NASDAQ:GRMN). It’s also tech giants like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Xiaomi. It’s even athletic outfits like adidas AG (ADR) (OTCMKTS:ADDYY).
The toll on FIT stock as more mouths eat into more and more of Fitbit’s market share has been horrific. Shares have lost 65% of their value since September.
Earnings reports have shown a clear deterioration of the business. During the holiday quarter, FIT lost $144 million and revenues plunged a grueling 19%. During this period, the unit shipments fell from 8.2 million to 6.5 million.
And there are few signs of improvement. For the current quarter, FIT is forecasting revenues of $270 million to $290 million and an adjusted loss of 18 cents to 20 cents a share. The Street consensus, on the other hand, was for $307.5 million on the top line and a net loss of 15 cents a share.
IDC Report Should Scare Holders of Fitbit Stock
Last week, IDC came out with its latest research report on the wearables market. As should be no surprise, a key finding was the competitive environment. For the most part, it appears that the U.S. market has already reached saturation levels.
According to the IDC report:
“In the past few months, two major platforms, WatchOS and Android Wear, have pivoted towards fitness and health applications. This is no accident, as that has been the only use case with any ‘stickiness’ and the ability to run third party apps has taken a backseat.”
The IDC report had some good news: namely, there continues to be plenty of opportunity in overseas markets, especially China. But FIT has not been proactive, and to fill the void, Apple, Samsung and Xiaomi have been grabbing a big piece of the market share.
Bottom Line on FIT Stock
The most important asset for Fitbit, though, is its brand. The company’s name defines the category.
But in the devices market, a brand, no matter how strong, can quickly evaporate. Ask Nokia Corp (ADR) (NYSE:NOK), BlackBerry, Flip or Palm. And no one wants to shell out big money for a device that feels like a has-been.
That doesn’t mean Fitbit hasn’t made the effort to innovate. Consider that in 2016, the company spent $320.2 million on R&D and launched four new products.
But Fitbit faces a brutally competitive market with rivals that have their own tremendous brands, plus financial resources and distribution footprints. It’s difficult to stand out, and existing customers have few reasons to upgrade.
FIT stock is in a very tough spot right now. And without a clear turnaround strategy, it’s hard to see how the company will get things back on track.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
