Fitbit Inc (FIT) stock has been a disaster since it went public last year, but some recent technical strength and better-than-expected earnings might have put the bottom in for Fitbit stock.
Sadly for anyone holding Fitbit stock, it’s just as likely that this run will reverse course like all the others.
FIT has lost about 25% from its $20 initial public offering, recovering from losses close to half its value just last month. As promising as the growth story might be, investors are rightly worried about a murder’s row of competition.
Fitbit claims largest share of the wearable market technology, as stated by research firm IDC. At the same time, Piper Jaffray believes mindshare has increased to 77%. But like so many first movers, FIT is vulnerable to larger companies pouring resources into its market. And they’re mostly guys you don’t want to go up against.
Apple Inc. (AAPL) has the Apple Watch and its incomparable skill at marrying hardware, software and marketing should make Fitbit stock holders nervous. Samsung (SSNLF) also knows something about making hit consumer electronics and it wants its piece of the wearables space. Garmin (GRMN) and privately held Xiaomi are also very much in the mix.
That’s not going to make the costs crushing the bottom get better anytime soon. FIT clobbered Wall Street’s fourth-quarter revenue and earnings forecasts, but the Q1 guidance was like opening an air lock. Fitbit said it expects Q1 earnings per share of anywhere from breakeven to 2 cents. But analysts are looking for EPS of 24 cents.
Fitbit Stock Hasn’t Looked This Good in Months
The issue isn’t on the top line — revenue growth is solid — but rather, it’s expenses. From the Fitbit Q4 earnings release:
“For the first time in the company’s history, Fitbit will make a global launch of new products, Fitbit Blaze and Alta. Launching media campaigns around the world is expected to drive higher sales and marketing expenses for the quarter … The company also expects to incur additional manufacturing costs in the first quarter to maximize production of new products to meet expected demand, which is expected to impact gross margins in the quarter.”
There’s nothing wrong with a company investing to build its business. Indeed, FIT should get credit for that. But the market apparently has higher expectations, which make it clear that the investment bankers overpriced the IPO.
That said, the price of FIT stock has probably come down enough that it deserves the benefit of the doubt. Shares trade at just 11 times forward earnings with a long-term growth forecast of 20% per year. In the nearer term, analysts on average expect Fitbit to grow EPS by 25% in 2017.
Click to Enlarge There’s an argument to be made that FIT is on sale. Additionally, some technical strength suggests the market might — might — be coming around to that view.
Fitbit stock just broke through resistance at its 50-day moving average for the first time since December.
Past breakthroughs have been short-lived, so make of that what you will, but the technicals bear watching.
It’s hard to have much conviction on Fitbit stock as a buy, but there’s good reason to think it will go higher from here. That is, unless it once again buckles at its 50-day MA.
In that case, forget it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
