When expectations are in the basement, it’s easy to “wow” investors. Such is the case with wearables maker Fitbit Inc (NYSE:FIT). All it took was hurdling a very low bar for FIT stock to pop by double digits after its most recent earnings report.
Fitbit handily topped Wall Street’s first-quarter earnings expectations, logging a loss of 15 cents per share, versus the consensus view for an 18-cent loss. Revenue was also above the board, plunging more than 40% year-over-year to $298.9 million, but topping expectations for $279 million.
But losses are expected to continue throughout 2017, with FIT projecting a full year loss of 44 cents to 22 cents and revenue of $1.5 billion to $1.7 billion. Guidance currently surrounds Wall Street’s targets of a loss of 35 cents and revenue of $1.6 billion.
In essence, there really is no “wow” factor here.
Fitbit still is hemorrhaging cash, and the market for wearables continues to grow worse, even for Apple Inc.’s (NASDAQ:AAPL) Apple Watch. The only solace Apple has is that it’s overtaking Fitbit (at least according to a recent report).
However, Apple would do well to seriously consider buying Fitbit, and a potential acquisition is really the only reason to consider owning FIT stock at this point.
But Fitbit stock rallied more than 12%, you say? That’s not that big of an achievement when you look at just how low expectations were before earnings.
Sentiment and Technicals
For instance, 14 of the 18 analysts following FIT rate the shares a “hold” or worse — a figure that hasn’t budged even after Fitbit’s first-quarter earnings report and subsequent rally.
In fact, the 12-month consensus price target of $7.11 lies just overhead, and could bring about valuation downgrades should FIT stock manage to gain additional ground.
Meanwhile, hardcore short sellers aren’t going anywhere. In the most recent reporting period, Fitbit short interest fell by 7%, as the weak hands were shaken out. Now that the earnings pop has played out, look for the shorts to return and provide additional pressure on FIT stock.
Click to Enlarge Finally, Fitbit options traders were not wholly swayed by the company’s quarterly report. Currently, the May put/call open interest ratio rests at 0.93, down slightly from last week’s readings north of 0.95, but still near the top of its recent range.
In other words, speculative traders still hold a bearish view of FIT, even after the company’s supposedly strong quarterly report.
As for volatility, May implieds are pricing in a potential move of about nearly 6% for FIT stock heading into expiration on the 19th. This places the upper bound at about $6.61, while the lower bound lies at near $5.89.
The upper bound is well shy of Fitbit’s post-earnings peak, while the lower bound is south of potential support at $6. In fact, a breach of $6 would be a sign that the shares are set to potentially test former lows near $5.30.
2 Trades for FIT Stock
Put Spread: With the post-earnings pop out of the way, it’s time to fade Fitbit. Those traders looking to benefit from waning enthusiasm might want to consider a May $6/$6.50 bear put spread.
At last check, this spread was offered at 18 cents, or $18 per pair of contracts. Breakeven lies at $6.32, while a maximum profit of 32 cents, or $32 per pair of contracts, is possible if FIT stock closes at or below $6 when May options expire.
Call Spread: For those traders unwilling to give up on Fitbit stock, or believe there is a bit more follow through buying in the post-earnings cards, there is an easy way to side with the bulls. Currently, the most popular May series strikes are the $6 and $7 calls. If you were to follow the lead of Fitbit stock bulls in the options pits, you’d end up with a May $6/$7 bull call spread.
At last check, this spread was offered at 43 cents, or $43 per pair of contracts. Breakeven lies at $6.43, while a maximum profit of 57 cents, or $57 per pair of contracts, is possible if FIT closes at or above $7 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
