Fitbit Inc (NYSE:FIT) stock recently beat first-quarter expectations last Wednesday, and the stock had jumped from a mid-$5 range to the mid-$6 range in the aftermath.
But that move looks like a dead-cat bounce. The truth about Fitbit is that company is getting eaten alive by competition, and the truth about FIT stock is that it’s a screaming sell here.
Here’s why.
Too Much Competition for Fitbit
FIT stock beat lousy expectations, and the stock soared.
But underneath the hood, the numbers weren’t that good. U.S. revenue fell 52%. Asia revenue fell 63%. Average selling price fell 4%. Gross margin contracted almost a full 7 percentage points. Devices sold fell nearly 40%.
But the big problem with Fitbit is that while FIT is throwing up hugely negative numbers, the competition is putting up really, really good numbers.
Garmin Ltd. (NASDAQ:GRMN) had a really strong holiday 2016. Revenues were up, gross margins expanded and earnings grew year-over-year. It was a fitting end to a year where GRMN really stole the show from FIT stock. Garmin’s fitness revenues soared 24% in 2016, and that growth is expected to continue in 2017.
What’s driving it? According to GRMN management, demand for advanced wearables is skyrocketing while demand for basic activity trackers is rapidly falling.
There is a similar narrative at play over at Apple Inc. (NASDAQ:AAPL), where Apple Watch sales nearly doubled year-over-year last quarter. The Apple Watch growth story is picking up steam everywhere, as CEO Tim Cook shared on a call with investors that Apple Watch sales doubled in six of the company’s top 10 markets.
Much like GRMN management, Cook implied that he expects the smartwatch market to mature and for competition to fall out. Cook noted similarities between the development of the smartwatch and development of the smartphone. With time, the smartphone became smarter and smarter, competition was squeezed out of the market, and the companies with the best devices controlled the market.
If the same happens in the smartwatch market, FIT could be looking at a very short future in the space.
That is because there is much more competition than just Apple and Garmin, and that competition has a lot more resources at their disposal than the upstart Fitbit.
The market is saying hello to mega-tech companies like Microsoft Corporation (NASDAQ:MSFT). It is also saying hello to athletic apparel giants like Under Armour Inc (NYSE:UAA, NYSE:UA) and Nike Inc (NYSE:NKE). Even traditional watch players like Fossil Group Inc (NASDAQ:FOSL) are transitioning the focus of their business to the wearables market.
Meanwhile, the market is impressed that Fitbit sold 40% fewer devices year-over-year last quarter.
That doesn’t make sense.
Bottom Line on FIT Stock
Fitbit’s bread-and-butter of simple wearables is going out of style, and now the company finds itself in a super competitive, over-saturated marketplace. I don’t really see anything that differentiates Fitbit in this new marketplace, and the numbers (devices sold down nearly 40% year-over-year) seem to agree.
FIT stock is also richly valued considering the financial situation. Revenues are in free-fall and gross margins are compressing rapidly. The company doesn’t run a profit, nor are they expected to in the near future.
Yet the market is still valuing FIT around $1.25 billion.
Again, that is a “head-scratcher” considering the company may never again earn a profit. Better to get out now.
As of this writing, Luke Lango was long FOSL and NKE.
