It has been a sorry introduction into Wall Street for Fitbit Inc (FIT), but sometimes, bad news can be unfairly overblown.
This isn’t a random, no-name startup whose market capitalization is based on hopes and dreams. We’re talking Fitbit, a company that has revolutionized the wearable technology sphere by incorporating chic-cool with the burgeoning personal fitness culture.
Yet despite accolades across the board, as an investment, Fitbit stock has stunk up the financial markets. Is FIT merely a pop-culture fad, or are the markets missing out on a golden opportunity?
FIT Stock’s Problems
If you’re a bearish on Fitbit stock — and judging from the short percentage of float, that’s seemingly everybody — the statistics are very much in your favor. Since FIT’s initial public offering in the latter half of June 2015, shares have lost nearly 53% of their value against their opening price.
Pity the poor souls who bought into the early hype when Fitbit stock briefly traded above $50 a pop — that’s the kind of pain that would haunt most investors into despair.
But why is FIT stock such a laggard? If the fact that company shares are completely out of favor in the markets is taken aside, few would find fault in the fundamentals. For example, operating and net margins for FIT are among the highest within its industry. Not to be overlooked is the massive improvement in gross margin. Two years ago, the gross profit was around 22% of top-line sales. By the fourth quarter of fiscal year 2015, that figure has jumped to a remarkable 49%.
That’s something that Apple Inc. (AAPL) — the king of culturally relevant tech — can’t say. Neither can many of AAPL’s competitors, like Sony Corp. (ADR) (SNE) nor HP Inc (HPQ), which sport noticeably inferior gross margins.
To make the case even stronger for Fitbit stock, its earnings reports since the FIT IPO are impressive — a perfect three beats out of three tries, with an average surprise of 117%. Yes, FIT stock is very early into the game, but come on! On paper, this is as good of a start as you can reasonably expect.
But for all the hand wringing, Fitbit stock continues to fall. Some would give an industry-centric explanation; specifically, that wearable tech hasn’t caught up with where it needs to be in order to cause a retail paradigm shift. As of yet, the ability to make a “smart shirt” is well off from being economically feasible.
Others will cite broader concerns, such as overall consumer strength and a slowly recovering labor market.
It also doesn’t help matters that FIT stock was recently the target of insider and venture capitalist selloffs.
Also, Americans as a whole are getting bigger — and dangerously so. The markets for now are viewing this as a net negative for Fitbit stock. To further the point, U.S. health officials last November stated that years of pro-health initiatives have completely failed to arrest the obesity trend.
So where does that leave FIT stock as an investment moving forward?
Is There a Silver Lining for Fitbit?
Despite the litany of terrible factors driving down the share price, there’s a heavy risk in taking too obvious of a trade. From the end of June 2015 until mid-February of this year, the short interest for Fitbit stock catapulted from 9% to 97%. Clearly, the bearish position has been extremely profitable since FIT peaked in early August.
Now with the whole neighborhood banking on the company’s collapse, the situation is just begging for a contrarian trade.
The other supportive argument is the valuation. Is Fitbit stock worth 56 times trailing earnings? Probably not. But at the current 19-times ratio, the story changes quite a bit. FIT has no debt, giving them powerful leverage to expand their business.
At the same time, their products benefit from a distinct brand that resonates with people. Sure, cost trolls could undercut FIT on price, but being the first to penetrate the market is a tough advantage to overturn.
For all the great marketing and product development efforts, Fitbit stock is a very tough sell for investors. That is a completely natural reaction, given that FIT has taken a steep haircut since its IPO, and that the pain has yet to subside. Nevertheless, to ignore the positives could be potentially foolish.
FIT stock is backed by solid fundamentals and industry-leading margins. They’ve taken the wearable tech idea to new heights, and their shares are trading at crazy levels.
For those wanting to take a speculative bet, this will FIT the bill quite nicely.
As of this writing, Josh Enomoto was long SNE.
