The decline in Fitbit (FIT) stock following its stellar earnings was completely unjustified. The pullback has given investors an opportunity to buy one of the hottest growth companies in the market at a very attractive price.
Fitbit’s third-quarter results show that the company is growing at a blistering pace. Earnings per share nearly doubled to 24 cents versus the same period a year earlier, and revenue surged 168% year-over-year to $409 million.
Both figures exceeded analysts’ consensus estimate, and Fitbit raised its full-year EPS guidance from a range of $0.69 – $0.77 to a range of $0.92 – $0.96.
The numbers indicate that Fitbit’s growth has not been significantly stunted by Apple’s (AAPL) Apple Watch. Indeed, research firm NPD estimated that FIT had a commanding 88% share of the U.S. wearable fitness tracking sales last quarter, according to Fitbit.
So FIT is the runaway leader of a market that is effectively a budding megatrend (wearable fitness trackers) within one of the largest megatrends of the 21st century (fitness and health).
Viewed from that perspective, Fitbit’s current market cap of less than $8 billion is really minuscule. Moreover, despite its rapid growth, FIT stock is now trading just 20% above where it closed after its first day of trading in June.
Fitbit Stock Unfairly Punished
In addition to the continued strong growth of wearables within the U.S., FIT has two other major catalysts. Specifically, the company can introduce other wearable products, taking advantage of the growth of the category, which is expected to jump from 50 million sold this year to nearly 150 million units in 2019, according to Business Insider.
And Fitbit’s international sales are likely to become a bigger part of its overall revenue as it scales its operations abroad, driving its overall growth rate even higher.
So why is Fitbit stock dropping? Detractors are pointing to the company’s decision to sell 7 million new shares of Fitbit stock and give current shareholders the opportunity to sell up to 17 million shares. They also point to Fitbit’s decision to allow its employees and consultants to sell about 2.3 million shares of Fitbit stock.
Additionally, the decline in the company’s gross margin last quarter to 48% from 55% may have scared some investors.
The reality, however, is that FIT is a rapidly growing tech company that is developing new products and expanding to new markets. In order to accomplish these goals, it needs to expand its sales force and operations, and ramp up its R&D spending. (Not surprisingly, its R&D spending nearly tripled last quarter versus the same period a year earlier, and its sales and marketing expenses nearly quadrupled in the third quarter.)
So nobody should be surprised by the company’s decision to raise more money or by the slight decline in the company’s gross margins. And given the intense competition for talent among tech companies, Fitbit’s decision to reward its employees by allowing them to sell more stock should hardly be shocking either. Nor are these developments signs of major problems.
The nervous Nellies selling FIT stock now were probably the same people who ran away from Facebook (FB) soon after its problematic IPO and bailed on Netflix (NFLX) in the wake of its pricing misstep. Like Facebook and Netflix then, Fitbit stock is poised to handsomely reward those who buy the shares while others panic over non-issues.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
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