Fitbit‘s (FIT) strong holiday sales should do wonders in silencing the critics and pushing FIT stock higher in the months ahead. While we won’t know exactly how many Fitbit units were sold during the holidays until Fitbit reports fourth-quarter earnings, there is some quite telling data to suggest that the number will be impressive.
Source: Fitbit
Fitbit has a Merry Christmas
In case you haven’t heard, Fitbit’s mobile application jumped to the top spot in Apple‘s (AAPL) App Store after Christmas.
To fully understand the implications of this data, keep in mind that iPhones, iPads and even the Apple Watch are all top presents during the holidays. This means that consumers are getting their new devices, opening them up and then downloading their favorite apps.
This activity was evident as Netflix (NFLX), Facebook (FB), Instagram, YouTube, Messenger and Snapchat all ranked atop the App Store’s rankings after Christmas. And investors expect to see these apps atop the list — but not Fitbit.
Yes, Fitbit has the most popular fitness application, which has consistently given it a top-25 rating due to 25% of U.S. consumers having a fitness application on their smartphone, according to NPD Group. However, Fitbit’s use and activity on smartphones comes nowhere near to the likes of YouTube, Messenger or Snapchat — apps with a much larger user base.
The fact that Fitbit’s mobile app jumped 20 spots to No. 1 after Christmas suggests that many, many consumers received Fitbit wearables and cared enough to download the app right after, on Christmas Day.
Fitbit Stock has Yet to Respond
All things considered, Fitbit stock is up about 1.5% since Christmas. While FIT stock has performed better than the S&P 500 since Christmas, a 1.5% gain is much less than one would figure following its big holiday jump.
However, underperformance and Fitbit stock have been a familiar pattern throughout 2015, with FIT stock down 43% from its high in early August. What’s odd is that Fitbit has done nothing but consistently exceed analyst expectations, raise guidance and prove to doubters that there is more than enough room for both basic and smart technology in the wearables space.
With that said, FIT is expecting full-year revenue of $1.8 billion. That $1.8 billion is $400 million higher than analysts expected just four months prior. However, FIT’s strong second- and third-quarter performance — and the way it has raised guidance following each period — has quickly led to an improved outlook.
When FIT sold 4.5 million units in the second quarter and 4.8 million in the third, it easily exceeded the most bullish of expectations. At the end of Q3, FIT owned 22.2% of the wearables market according to IDC, and based on initial data and FIT’s rise up the App Store’s top app list, my guess is that it will gain more share and surpass all expectations once more in Q4.
At 26 times next year’s earnings, Fitbit stock isn’t necessarily cheap, but given the 141% revenue growth expected for this year, on top of 174% growth last year, FIT stock is well worth the premium.
Looking ahead, FIT’s growth is expected to decelerate in 2016, down to just 33.5% with revenue of $2.4 billion. However, based on what we have seen from Fitbit in each quarter since becoming public, that outlook is likely very conservative.
Not to mention, FIT is not just a revenue-growth story, but also one of margin expansion.
What to Expect From Fitbit Stock
Collectively, these things make Fitbit stock a top opportunity headed into 2016.
However, FIT stock has been a favorite among short sellers since its IPO earlier this year. Some still think smart wearables will cannibalize basic wearables. So far, this belief has not proven to be true, as Fitbit continues to thrive despite the Apple Watch launch earlier this year and countless variations of Android Wear entering the market.
Currently, short interest in Fitbit stock is at an all-time high, with 28.9 million shares short, or 49% of its total shares outstanding. This rising short interest has been a continuous drag on Fitbit stock, but like Warren Buffett always says, “If a business does well over time, the stock price eventually follows.”
Looking ahead, FIT continues to do very well, and a very strong Q4 coupled with increased guidance should be the trick that causes short sellers to throw in the towel.
At the end of the day, Fitbit stock’s prospects couldn’t be better headed in 2016.
As of this writing, Brian Nichols owned FIT stock.
