Fitbit Inc: Could Fitbit Stock Be the Next Facebook? (FIT)

There's lots to love about FIT, as comparisons to GoPro are wildly off base

The old adage that misery loves company sure seems to be true in the world of tech right now — especially when it comes to stepping from Silicon Valley onto Wall Street.

Quite a few one-time tech darlings, including Fitbit Inc (FIT) and GoPro (GPRO), are sitting below their initial public offering prices.

Just take a look at the chart below, which is full of bloodshed to say the least.

Fitbit Inc: Could Fitbit Stock Be the Next Facebook? (FIT)

A company’s IPO price marks a huge psychological landmark for investors. Most stocks move higher during their first day on Wall Street, with Renaissance Capital clocking the average one-day gain at 14% last year. Highly anticipated tech players often enjoy an even larger pop, which is why GPRO more than doubled on its first day in 2014 and FIT closed nearly 50% higher when it hit the public markets last summer.

Thus, a drop back below the IPO price means those early gains have been erased and then some. And, of course, it also makes for some clicky headlines:

The fact that once-beloved companies like Twitter (TWTR) and GoPro are now respectively worth 35% and 60% less than they were initially priced  — and that there’s ongoing publicity surrounding their declines — is likely playing a role in the recent IPO slowdown. January marked the first dry month for IPOs since 2011.

But the overarching narrative of up-and-coming tech darlings falling short could potentially be snowballing. Investors, perhaps in part due to the rockiness of the broader markets right now, seem to be lumping these younger tech names together, meaning the selloff for some may be overdone.

Fitbit stock, for example, hit Wall Street about a year after GoPro and is often lumped in the same dilemma as the camera-maker. Bears have called both “single-use” companies, citing the falling barriers to entry as a driver of increased competition and have expressed concerned about maturing end markets.

But FIT actually has more in common with another tech company — and one that investors show plenty of love — Facebook (FB).

Why Fitbit Stock Might Surprise You

The comparison between FIT and GPRO stock feels more natural because both are seen as hardware companies (and, once again, because both are taking a beating). Facebook, on the other hand, is a social network. But the distinction between hardware and software, and websites and other content served on top of it, is increasingly blurred.

GoPro, to an extent, is a software company: In fact, its easy-to-use editing software has been criticized as a barrier to expanding its user base. The company’s founder and CEO nodded to this in a conference call earlier this week, saying: “We recognize the need to develop software solutions that make it easier for our customers to offload, access and edit their GoPro content.”

Fitbit’s software (and software partnerships) are just as important as its actual wearables, while Facebook is heading to this middle ground from the opposite direction with the launch of its virtual reality headset.

Meanwhile, there are several important distinctions between GoPro and Fitbit (even beyond the fact that Fitbit seems well ahead of GoPro in software, as mentioned, and is enjoying better reception of its latest hardware.) The debut of the new Alta provided Fitbit stock some relief, while GoPro was forced to slice the price for its most recent model, the Hero4, not once, but twice.

More specifically, there are two main macro trends in Fitbit’s corner which spark a promising Facebook comparison.

The first factor is Fitbit’s market. Once again, there’s a misconception, as CEO James Park noted at a Re/code conference last fall, that Fitbit is a wearables or hardware company. But Fitbit’s mission and market are much broader. FIT sees itself as a “digital health company,” which ties it to what is arguably the mega-trend of the decade.

Consumers spend over $200 billion on health and fitness products each year, and Park has acknowledged that Fitbit just needs a slice of that to be successful. That spending doesn’t necessarily wrap in the potential of corporate wellness either — a growing market which can’t be understated. GoPro and other tech laggards mentioned don’t have a comparable opportunity anywhere near as strong blowing at their backs.

The second differentiator for Fitbit is the social aspect of its platform, as users can challenge and engage with friends and family. Studies have shown that every friend a user has correlates (to a certain plateau, of course) with increased activity — but it could also spur increased adoption and lead to long-term loyalty. The social component makes Fitbit’s first-mover advantage dramatically more significant, as seems to have been the case with Facebook.

As you can likely remember, Facebook’s early days on Wall Street weren’t all smooth sailing. Facebook’s IPO was dubbed “disastrous,” although the disaster was of a slightly different flavor than the other tech names we’ve mentioned. There was no out-of-the-gate pop — just a beeline below Facebook stock’s initial price.

The reaction was similar, though: A media frenzy and negative sentiment weighed on FB stock for over a year before it got its grounding. At the same time, Facebook faced criticism and concerns as the stock was struggling. New social media sites were cited as problematic competition, along with claims (which I’ll plead guilty to making) that Facebook was losing its cool.

Since those days, Facebook’s been heading nowhere but up from a stock perspective. Shares jumped 15% in one day after the company’s most recent earnings report, helping them to a 46%  gain over the last 12 months vs. a 4% decline for the market and an average loss of 50% for the five stocks listed above. Zooming out, they’ve more or less header higher since mid-2013.

While there are a few specific catalysts credited in that uptrend (mobile advertising being the big one), a first-mover advantage should first be credited for the loyal and broad user base that underpins the company.

The social aspect of Fitbit, especially when combined with the health mega-trend, could stem a similar kind of rebound.

Fitbit Stock, Quantified

All this isn’t to say Fitbit stock didn’t get ahead of itself after the initial pop or that it doesn’t have an uphill battle ahead of it. But an overly optimistic debut was followed by an even greater overreaction in the other direction, driven in part by the struggles of so-called comparable companies like GoPro and other laggards.

The reality is that Fitbit boasts stronger fundamentals that the tech new kids it’s being lumped with.

Out of the five in the ugly chart cited earlier, Fitbit has the strongest revenue growth, having posted triple-digit gains every quarter since going public. It’s also one of only two in the list that was profitable over the last 12 months and is slated for annual EPS growth of 30% per year long-term.

That’s appealing considering the stock has been beaten down to just 13 times forward earnings.

Since November, even in the face of negative publicity and investor selling, five analysts have initiated or upgraded the stock to buy ratings — including one last week from Oppenheimer, citing the digital health mega-trend, and a recent one from RBC Capital, specifically refuting the popular GoPro comparison.

And while analyst price targets can sometimes lag what’s happening in the markets, the lowest target is more than 60% above the current Fitbit stock price even after this Wednesday 5% gain (which came in spite of the lockup expiration).

Toss in the social component, which gives Fitbit stock far more in common with current Wall Street darling Facebook than anyone seems to be acknowledging, and there’s reason to believe that in a few years we’ll look back at the recent rockiness and remember it merely as a rough start to a longer-term Wall Street growth story, as is the case with FB.

Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Forbes, Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she was long FB.

More From InvestorPlace

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC