Fitbit Inc. (FIT) stock has been in free fall recently, with shares sliding 12% Friday, closing at a post-offering low below $28 a share. Given the recent spate of negativity, now’s as good a time as ever to remember the old Warren Buffett adage, “Buy under gunfire, sell under fireworks.”
Such is the battle cry of the contrarian investor, and if you can stick to your guns, it’s a darn good one to live by.
Let’s take a look at just why the market is so sour on Fitbit stock, and why shares look so attractive after the selloff.
Fitbit Secondary Offering, New Competition
Fitbit stock took a beating on Friday after the company announced the details of a secondary offering, something investors knew was on the way since the week before.
That’s because the prior week saw the release of Fitbit earnings, and the company decided to announce its intentions for a follow-on offering alongside what turned out to be absolutely stellar third-quarter results:
“FIT posted adjusted earnings of 24 cents per share in the third quarter, cruising past the consensus 10-cent estimate. Revenue also walloped expectations, clocking in at $409 million — a 168% year-over-year growth rate and well above the $350 million analysts expected.”
It was the second time in as many quarters that FIT stock had exceeded earnings per share and revenue expectations. The company has only been public since June.
Fitbit stock initially sold off to the tune of 8% after the announcement of the secondary offering, but Wall Street became even more bearish on Friday after the specifics were released: The company would be offering 17 million shares for sale — 14 million from insiders and 3 million from the company itself — at a price of $29/share. Fitbit had originally planned to sell a total of 21 million shares, with 7 million coming from the company itself.
Investors were disappointed to see a reduction in the number of shares that the company would sell, because that means less money from the FIT stock offering will go directly to the company. After all, Fitbit could always use additional funds for things like R&D and marketing, especially considering the fiercely competitive wearables industry.
Speaking of competition, it didn’t help Fitbit’s case that Fossil Group (FOSL) decided to swoop in and buy Fitbit’s direct competitor, Misfit, for $260 million. The new company combines Fossil’s watch expertise, brand and resources with Misfit’s wearables know-how, creating a much more formidable competitor.
Oh, and there’s a little company called Apple (AAPL) that’s also interested in the space.
Bottom Line on FIT Stock
So how does all this factor into why you should buy Fitbit stock? Well, the truth of the matter is FIT stock still trades at a pretty attractive valuation, especially considering the rate at which the wearables industry is growing. I mean, the company managed to boost sales by 170% last quarter, despite a lack of any major Q3 gift-giving holidays.
I’d imagine that Q4 might be a little more generous.
FIT stock trades at around 25 times forward earnings, and that number becomes even smaller if Fitbit continues to demolish analyst expectations quarter after quarter.
Sure, we can’t expect a trend like that to go on forever, but there’s reason to believe management has been giving conservative guidance in its early days as a public company.
Plus, if we look at the new entrants to a market in just a slightly different light, Fossil’s decision to buy Misfit is more a confirmation that FIT has been on the right track than it is a foreboding omen.
As of this writing, John Divine was long FIT stock and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
