Fitbit (FIT) is a leading wearables company dedicated to making products that aid customers in monitoring their exercise and physical health. The company was a pioneer in its market category and rode that momentum to a successful IPO just under a year ago.
FIT stock surged following the IPO, rising to has high as $51 per share last summer. Since then, it’s seen a drastic change in the health of the company’s shares. Following increasing doubts about the sustainability of the company’s business model, FIT stock suffered cardiac arrest, slumping from $50 to $12.
In recent weeks, Fitbit stock has begun to recover, moving back up to above $15. Is this the start of a new rally inf FIT stock, or just a little blip?
Fitbit Stock Pros
Explosive Growth: Fitbit is the sort of massive growth story that gets Wall Street most excited. In 2012, the company sold just $76 million of product. By 2014, this was up to $745 million, and in 2015, things were into overdrive, with revenue soaring to $1.9 billion. This is high quality revenue, as well. The company earns a 48% gross margin and 19% operating margin on sales. That’s well into the high-quality tier of consumer tech products.
Unlike many of the hot tech stocks, Fitbit is strongly profitable on an earnings per share basis as well. Full year 2015 brought earnings of 77 cents per share, leaving the PE on the the stock at a reasonable 20.
Buyout Target: With the plunge in FIT stock, it raises the probability that a bidder will come for the company. When FIT stock was at $40 or $50, a buyer had to have great confidence that a deal would work. At $15, a buyer would only need to offer something in the low 20s to succeed. There’s much less risk for a potential suitor at this price point.
Who might want to buy? The most logical takeout partner may well be Under Armour (UA). The company is on a hot streak following the hugely successful Stephen Curry line of basketball shoes. The company has the funds and management flexibility to go on an acquisitive spree.
Under Armour has already been buying fitness apps such as MapMyFitness and MyFitnessPal. Throwing a watch into the mix would allow them to move these products beyond just the phone ecosystem.
Successful Blaze Launch: As of the end of March, Fitbit announced that more than a million Fitbit Blaze smartwatches and 1 million Fitbit Alta wristband units had been sold in their first month on the market. These figures were ahead of internal forecasts.
Both products have gotten excellent reviews. Amazon reviews for the products have them well ahead of previous Fitbit models. The successful launch indicates that there is still a good deal of interest in the Fitbit concept and argues against the idea that the company has been riding a fad.
Cheering the success, Fitbit stock took off on the good news.
Fitbit Stock Cons
Launch May Not Actually Be Strong: While the above point about strong initial sales is encouraging, on the flipside, it must be mentioned that it appears the strong initial sales push was mostly from inventory build. Last week, BlueFin Research addressed the positive Blaze launch and raised questions. BlueFin cut its 2016 unit sales and revenue guidance.
It claims that various major American retailers have “inflated” Fitbit inventory levels. It also says there are rumors about that Fitbit is cutting production levels. So for the time being, you can look at either the bright or dark side of the recent product launches. We’ll have to wait for a quarter or two to see if the glass is actually half full or empty.
Fitbit Could Be A Fad: The fitness industry, for whatever reason, is very prone to short-lived bursts of enthusiasm. Tae bo, Bowflex, Thighmaster, and so on. You could make a long list. Several of these were story stocks on Wall Street for a time. A rollerblading stock was a high-flier at one point. Now it’s FIT stock’s turn.
In Fitbit’s case, there are troubling signs. The company admits that half of its customers stop using their product after a year, and another 40% drop off in the subsequent year. While many consumers are eager to buy one Fitbit product, it’s not so clear that there will be much of a repeat market. Also, almost 40% of Fitbit’s sales occur in the holiday quarter. Fitbit has found a bunch of early adopters who love the product, but it’s far from certain that the mainstream consumer will want to do anything more than try Fitbit once and quit using it after a short while.
Apple Provides Strong Competition: Fitbit, like many disruptive consumer tech companies, has to face off with the Apple (AAPL) menace. Apple is rarely the first mover, but once it launches, competitors better take cover. Did Apple make the first nice MP3 player? No. But once the iPod launched, it was pretty much lights out for everyone else.
Similarly, the Kindle was (is) arguably a better e-reader than Apple’s iPad. Kindle was there first, built a strong brand, has a sizable ecosystem, and yet it still vastly trails the iPad in sales. While Fitbit got going in the wearables market well before Apple, it’s not certain customers will be loyal to Fitbit. Apple has huge customer mindshare and an unrivaled brand generally.
Apple’s smartwatch gets better Amazon reviews than even the new Fitbit lines. It’s hard to envision a scenario where the Watch doesn’t either cannibalize Fitbit’s business or cause Fitbit to suffer serious pricing power erosion, lowering the company’s still-enviable margins.
Fitbit Stock: Verdict
FIT stock is heavily shorted. It’s not hard to imagine a scenario where the stock runs to $20 or $25 in coming weeks as traders bid the company up on the Blaze’s strong start. I’d be very nervous if I were short FIT stock at the present. But the stock is not a good buy and hold long-term investment.
The company’s business may well be a passing fad; even if it isn’t, there’s a good chance Apple will end up seizing the market. If you want to buy FIT stock, that’s great, but keep it on a short leash.
At the time of this writing, Ian Bezek held no position in any stocks mentioned. You can reach him on Twitter at @irbezek.