Fitbit Inc’s (FIT) stock is out of shape after an impressive post-IPO run, culminating in Tuesday’s crash after its fourth-quarter earnings.
The damage? More than 20% losses in about a week. Roughly 60% losses since the new year kicked off. And since its peak in August of this year, FIT stock has been dumped to the tune of 75%.
Fitbit is beaten, broken and loathed by Wall Street.
And there’s no better time to buy it. FIT stock remains primed to perform well thanks to a super-hot health and wellness category with impressive growth prospects. The global wearables segment could surpass the traditional watch market by 2020, according to AdvertisingAge. And who happens to be No. 1 in the category today? According to IDC, that would be Fitbit as of the end of the fourth quarter, with a dominating 29.5% market share — nearly double Apple Inc.’s (AAPL) market share.
In addition to being the current market leader, FIT operates a profitable business model that allows it to reinvestment in the business and stay ahead of its peers. At the end of Fitbit’s fourth quarter, the company’s R&D headcount increased to 624 from 461 in the prior quarter and 226 at the end of 2014.
While FIT more than doubled its R&D headcount throughout 2015, Fitbit also more than doubled its full-year 2015 EBITDA to $389.9 million from $191 million in 2014.
FIT isn’t just investing in R&D; the company is pouring money into its hardware, software, support, marketing and other key areas. Fitbit also is in great financial straits. FIT ended its most recent quarter with $664.5 million in cash, up from $575.5 million at the end of the third quarter. That cash is set against absolutely no debt.
FIT Stock Is Getting Cheap
At 8.8 times next year’s estimated earnings, FIT stock certainly is priced as if its products are merely a fad. That multiple seems even more criminal when you consider that earnings are expected to grow by around 23% next fiscal year.
For perspective, Garmin Ltd. (GRMN), the fifth largest wearable vendor per IDC’s data, is trading at more than 17 times next year’s estimated earnings despite expected profit growth of just 3%.
And when Garmin reported its fourth-quarter results, the company noted that its fitness segment saw revenue growth of 14%in the quarter, well below Fitbit’s 92% year-over-year revenue in the same quarter.
Yes, Fitbit might not be growing as much as Wall Street hopes, but there’s certainly a lot more upside in an undervalued growth stock than an overvalued tech company whose best days are long behind, right?
Fitbit bears, ask yourselves: Why is FIT stock trading at a significant discount to a company whose GRMN stock whose business has been in decline for quite some time?
Fitbit’s Conservative Guidance Worries Some
Fitbit’s guidance for 2016 may have surprised investors; the company warned its unit growth rate will be in the low 30%range. Granted, this does represent a noticeable drop from 2015’s level, but management admitted that it has a “track record” of leaning on the conservative side.
Said CFO William (Bill) Zerella during the Q4 earnings conference call:
“We’re really excited about these new products but since they haven’t really got into the market yet, we’re going to lean on the conservative side until we start to see reorder volume and adoption rates and then we’ll adjust our guidance accordingly as we go through the year.”
And again, realize that conservative estimates still include impressive double-digit growth.
Bottom Line
There’s also an oft-overlooked fact supporting the bull thesis. Most people that talk about FIT stock are quick to point out that Fitbit’s 17 million active users are up more than 150% from 2014’s level — and that’s certainly good.
But also of note is that the average user now connects with 7.5 friends, up from 4.9 at the end of 2014.
“This is important because having more friends typically results in increased personal activity levels,” CEO James Park said on the call. “I think that speaks directly to the engagement of the total Fitbit user experience.”
In other words, Fitbit is creating an ecosystem — one where users are starting to enjoy the benefits of being connected with even more users, which should help make Fitbit’s products even stickier.
There is little doubt that the continued merging of technology with health and fitness will remain a megatrend over the coming years. Invest in tomorrow’s winners — and that includes FIT stock
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
