Shares of the wearable fitness tracking company Fitbit (FIT) got hammered in after-hours trading on Monday, as the proposal for a secondary offering didn’t bode well with investors.
FIT stock fell as much as 8% in afternoon trading.
Before yesterday’s Q3 report, Fitbit stock was having quite the year. After roaring 50% higher on its IPO day, shares continued to advance, and were up another 37% through Monday’s close.
It was a somewhat rare scene of events, given how thoroughly FIT stock topped on both earnings and revenue expectations. But the secondary offering — as well as the company’s intention to lift a lock-up period on 2.3 million shares held by insiders and consultants — was too much to bear.
FIT Stock Delivers Decisive Q3 Beats …
Before getting too technical, let’s look at Fitbit’s raw numbers, which were incredible, as I suspected.
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.
I noted late last week that the $350 million figure seemed a little light given previous quarterly trends and a perceived conservative bias from management’s guidance. Also …
“Despite a lack of big gift-giving holidays in Q3, corporate wellness initiatives should provide some degree of sales boost. Target (TGT), for example, is offering Fitbits to 335,000 employees in an effort to keep employees healthy. Bank of America (BAC) and Time Warner (TWX) also have corporate accounts with Fitbit.”
Fitbit remains on track for solid growth with these larger accounts: The company added more than 20 new corporate wellness customers in the last four months alone.
It also guided for fourth-quarter adjusted EPS between 20 cents and 25 cents per share on revenue between $620 million and $650 million, again well above the 20 cents and $589.7 million consensus estimates.
By all means, if the company hadn’t done anything else, FIT stock would be soaring.
… And Promptly Announces Secondary Offering
Instead, management took the good news as an opportunity to announce a secondary offering of 21 million shares — 14 million from insiders and 7 million from the company itself. Shake Shack (SHAK) pulled a similar move a few months back when it announced a secondary offering of its own, only in that situation, the funds just went to fat-cat insiders, not SHAK itself.
While you never like to see more shares flood the market, at least FIT will be able to raise more funds to put toward the company’s growth. The company said that money would be used for a variety of costs, from general and administrative to research and development and marketing.
What is a little odd is the company’s decision to lift the lock-up period on 2.3 million shares for insiders and consultants. This is unusual, but the rationale behind the move is sound: Fitbit is giving liquidity to employees and partners before the quarter-end blackout period, which prohibits them from selling during peak holiday sales periods through the release of fourth-quarter earnings.
The lock-up period would have ended on Dec. 14.
With the market for wearable devices continuing to grow at a breakneck pace, I don’t find the secondary offering and lock-up lift too offensive. I’ve been a FIT stock owner since the day it went public, and continue to see the breakneck growth that I invested in to begin with.
Unless dilution gets out of control down the road, and until sales growth starts to wane substantially, I think Fitbit stock is still a compelling buy — especially on the dip.
As of this writing, John Divine was long FIT stock. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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