Fitbit Inc (NYSE:FIT) stock is getting thinner and thinner. It’s as if there is no floor on this thing. For the year so far, FIT stock is off nearly 30%. And for the past 12 months, the return is an awful 56%.
But is Wall Street getting too negative? Could there be a value opportunity here? Perhaps, but cheap stocks can remain that way for a long time.
This is often the case with fallen device makers. Just look at the histories of companies like BlackBerry Ltd (NASDAQ:BBRY), Palm and Nokia Oyj (ADR) (NYSE:NOK). They were dead money for prolonged periods of time.
Unfortunately, I think the same thing could be happening with FIT stock. The fact is that the company’s brand is quickly becoming irrelevant, which will make it tough to get attention in a crowded marketplace.
You do not need to look further than the last couple earnings reports:
- Fourth Quarter: FIT missed out on the all-important holiday season. Revenues dropped by 19% to $573.8 as the adjusted EBITDA came to only $6.5 million. During the period, the number of devices sold fell by 18.8% to 6.5 million.
- First Quarter: Revenues plunged 41% to 298.9 and the adjusted EBITDA came to a loss of $52.3 million. The number of devices sold fell from 4.8 million to 3 million.
Even more frustrating for holders of FIT stock, the market for wearables continues to grow at a strong pace. According to the most recent report from IDC, the number of shipments jumped by nearly 18% during Q1 — on a global basis — to 24.7 million. Apple Inc. (NASDAQ:AAPL) saw a 61.1% spike to 3.6 million. As a result, the company now shares the top spot with Xiaomi in terms of marketshare, as Fitbit has dropped to the No. 3 player.
IDC’s Ramon Llamas had this to say:
“Fitbit finds itself in the midst of a transformation as user tastes evolve from fitness bands to watches and other products. This allowed Xiaomi to throttle up on its inexpensive devices within the China market and for Apple to leverage its position as the leading smartwatch provider worldwide. Now that Xiaomi and Apple have supplanted Fitbit, the next question is whether they will be able to maintain their position.”
This appears to be a classic case of disruption. For the most part, when it comes to wearables, consumers want much more than just activity tracking. They want the kind of features that a smartwatch provides, such as a seamless connection with your phone and access to an appstore.
The problem for Fitbit is that it has been caught flat-footed as it still does not have a smartwatch. True, the company has made an assortment of acquisitions in the space, such as for Coin, Pebble and Vector. But so far, it is unclear what — or even if — Fitbit will have its own offering.
But even if it does, the company will have lots of challenges in the market. AAPL is already becoming the top-of-mind brand in the industry and it is continuing to innovate. The company also has other incredible advantages like a global infrastructure, retail outlets, an army of talented engineers and a massive appstore. There is also an extensive ecosystem of app developers.
As InvestorPlace contributor Luke Lango has noted recently: “Much like the smartphone market, as the wearables market matures, competition gets squeezed out, and only the powerful few survive.”
Bottom Line on FIT Stock
Now all is not hopeless with Fitbit stock, though. The company has a strong balance sheet and solid portfolio of intellectual property assets. In other words, it could be an interesting buyout opportunity for a mega tech operator like Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT). A deal for Fibbit stock to quickly jumpstart its efforts in the space.
But the company really needs to act fast. Again, as seen with the sudden drop in marketshare, Fitbit appears to be quickly losing its luster.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
