Almost every stock on the market has had a rough time this year so far, but it’s hard to find a name that has struggled as much as former IPO-darling Fitbit (FIT). As I mentioned in my last article on the company, the stock has fallen a long way from its $50 peak, hitting a new 52-week low today.
There are a handful of factors you can blame for its sad decline, ranging from a class action lawsuit filed against Fitbit’s Charge HR to competition with Apple Inc.’s (AAPL) own smartwatch. At its core, though, Fitbit is a glaring example of how investor hype can turn actively destructive.
Hardly anyone can deny that Fitbit makes great products. Its watches are still selling out everywhere — which is a far better position than GoPro Inc (GPRO) sales, which are stalling fast. The problem is that Fitbit was a growth stock from the get-go, and is now suffering from traders’ declining appetite for stocks of that nature.
In other words, no one wants to pay massive multiples right now, which is what had been propelling FIT stock forward since last year.
Fitbit Hasn’t Kept Up the Growth
Six months ago, investors were obsessed with hot themes, and so they crowded into stocks like Fitbit, as well as GoPro and Keurig Green Mountain Inc (GMCR). That crowd mentality pushed multiples to rare levels.
Then, when enough growth names demonstrated that it might take years or longer to grow into those multiples, the crowd started to recoil. GMCR’s new large travel-mug-sized pods didn’t impress anyone, and GPRO has been sitting on stale cameras for months. Narratives like these cause investors to take a closer look at their high-multiple holdings and cut the weakest and most expensive. Suddenly, Fitbit looks unsustainably rich, which means sell, sell, sell.
To keep the growth story alive in the face of cooling sentiment, Fitbit needed to knock everyone’s socks off. Instead, it delivered a decent product line extension. For any other company, that would’ve been an OK move considering it already dominates the smartwatch category — but it wasn’t disruptive enough for a market that’s already a bit wary. Fitbit was truly priced for perfection, so delivering “decent” results just didn’t cut it.
The good news is that investors might be able to start finding a bottom as yesterday’s best growth stocks turn into value plays. Confidence may rematerialize after a few solid buying sessions, and we could see multiples start to inflate again. Emphasis on “could.”
So Fitbit isn’t necessarily doomed. At this point, the company can soldier on until its product line becomes irrelevant … or management can start considering takeout offers. GMCR is a good example of what could happen: It also had a bad reaction to an OK product launch, the stock cratered and then private equity swooped in. Fitbit might be a nice strategic buy on the mergers and acquisitions (M&A) side — after all, even the bears on Wall Street insist that it’s worth $24.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.