Fitbit (FIT), the wearable fitness device company, went public less than two months ago, and ever since then FIT stock has been a hot commodity.
Actually, before it even went public it was in high demand: Fitbit stock raised its initial price range from $14 to $16 to $17 to $19, then finally decided to price at $20 per share. On June 18, its first day of trading, shares jumped 50%.
Since then, FIT stock is up another 65%, and at $49 shares are up 145% from their IPO price.
But now for the moment of truth: Can the numbers live up to the hype? Here are three things to watch for when Fitbit reports Q2 earnings after the bell on Wednesday:
Fit Revenue Growth
I know, it’s the obvious choice. Investors are focused on revenue and EPS figures every quarter for every company. But this is Fitbit’s first report as a public company, and investors won’t treat FIT stock kindly if it starts off with a revenue miss.
Especially considering how phenomenal the company’s first-quarter sales growth was: In its S-1 filing with the Securities and Exchange Commission, Fitbit reported sales of $336.8 million, up 209% from $108.8 million in Q1 2014.
For the second quarter, analysts expect revenue of $319.45 million, a 181% increase from $113.57 million in the year-ago quarter.
Considering the fact that Apple (AAPL) Watch sales were nothing to write home about last quarter, a Fitbit sales miss would only fuel the simplistic, but oft-repeated, criticism that wearable technology is a fad.
That’s the last criticism FIT stock bulls want to see validated.
Gross margin is the percentage of revenue left over after factoring in the cost of goods sold. In Q1 2014, Fitbit’s gross margin was, at 41%, pretty good. Those are slightly above Apple’s margins, which says a lot because AAPL also enjoys sky-high markups from its software services.
Fitbit will never enjoy the mouthwatering 60%-and-up gross margins that software giants like Google (GOOG, GOOGL) and Microsoft (MSFT) enjoy; or the obscene 75% to 80% gross margins that purer software companies like Oracle (ORCL) and Salesforce (CRM) enjoy, but last quarter FIT’s gross margin was 50%, which is pretty darn good.
Heavy marketing and R&D may subdue Fitbit’s bottom-line numbers, with FIT stock expected to earn 8 cents per share, but advantages from scale and product mix should keep Fitbit’s gross margins above 45%.
The last thing to watch for — and what ultimately may be the most important factor in determining how FIT stock moves after earnings — is guidance. After all, when we invest, we invest in a company’s future, not its past.
FIT’s guidance has to come in-line with Wall Street’s fiscal 2015 expectations of 61 cents per share on $1.41 billion in revenue. If it misses badly, the rally will likely come to a sudden end. Even in-line guidance could doom the high-flying stock for a pullback.
But if management sees much higher revenue and earnings than Wall Street, FIT stock should continue to soar ever higher.
I don’t pretend to know how Fitbit will do when it reports, but I’m a strong believer in Fitbit stock myself, for whatever that’s worth.
We’ll see if the numbers back me up.
As of this writing, John Divine was long shares of FIT stock and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.