Fitbit Inc (FIT) has had a rough start to 2016 — and, no, it’s not necessarily because the entire market has had a turbulent start to the year. We can mostly trace this down to fears that Fitbit stock isn’t well-diversified enough, in addition to not having an economic moat in its industry.
And there are at least two pieces of evidence that have given root to such fear. First, GoPro Inc (GPRO) announced preliminary results for 2015 on Jan. 13, and the signal it gave was that its revenues would continue to shrink, as its industry is at risk of commoditization.
What does that have to do with Fitbit stock, you ask? The general belief is that, like GoPro, Fitbit manufactures “one-trick” products that can be readily commoditized.
Fitbit’s Narrow Focus
Bears would point to previous failures of “one-trick” hardware companies like Flip, which CISCO Systems, Inc. (CSCO) later acquired. And to be sincere, it’s not out of place to classify Fitbit as a “one-trick” hardware company as well.
Second, data from IDC indicates that Fitbit stock lost a significant portion of its market share between the third quarter of 2014 and 2015, dropping from 32.8% to 22.2% during that period.
Long story short, all the worries about Fitbit stock so far are genuine.
And Fitbit would have to work hard to build a moat for itself in the wearables industry, perhaps through offerings and programs — like the current corporate wellness program it has going on — that competitors can’t break easily. Only then can investors consider Fitbit stock one for the long haul.
However, regardless of these current worries, Fitbit stock might be in for a rally once the company announces financial figures for 2015 on Thursday.
Housekeeping matters first — analysts anticipate that Fitbit stock will report earnings of about $1 per share, according data collated by Financial Times. In addition, expectations are that Fitbit stock will report revenues of around $1.8 billion for FY15. That would be a 141% improvement on the $745 million that it reported for FY14.
Early indications are that Fitbit stock should easily surpass expectations. By the end of the ninth month of 2015, Fitbit stock had realized $1.146 billion in revenues. By implication, FIT is only seeking to make $653.6 million in the fourth quarter to meet expectations.
The Good News for FIT Stock
Here’s why I believe that FIT will surpass expectations.
First, bear in mind that Fitbit stock is a bit like a retailer of its products. And as with all retail businesses, the holiday season is usually the peak sales period. So chances are high that FIT stock will makes well over the $409 million it realized in the third quarter to meet expectations.
Second, Fortune reported on the first day of the year that the Fitbit app was the hottest free download in the iTunes store beginning from Christmas afternoon. And by the end of the year, it hadn’t dropped below 13th.
Judging by the size and popularity of the Alphabet Inc’s (GOOG, GOOGL) Google Play store, we can make an educated guess that the Fitbit app would have been popular on the platform during the holidays as well, even if it wasn’t number one.
While this doesn’t tell us how much consumers spent on Fitbit products during the holiday season, we can reasonably guess that Fitbit stock did sell plenty of its products.
In short, as predicted earlier, Fitbit will surpass expectations based on positive holiday sales signal, which should normally kick-start a rally.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
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