To say that the initial public offering of Fitbit Inc (FIT) has been disappointing would be a grievous understatement.
Launched in the markets on June 18, 2015, Fitbit stock sprinted to a 74% gain before getting winded. Concerns about copy-cat competitors and a so-so economy presented a dark cloud over Fitbit stock.
For 2015, FIT eventually ended nearly flat against its IPO, and year-to-date, shares are down a miserable 43%. Yet, in spite of this turmoil, Fitbit stock has launched a quiet, if not underappreciated, rally.
On Wednesday, FIT closed up more than 2% after moving as high as 5% on an intraday basis.
The modest lift came as a result of a positive report from Morgan Stanley. Analysts at the investment banking firm noted that sales for the Fitbit Blaze and Alta were exceeding expectations — so much so that some retailers were already placing replenishment orders.
This should help the wearables company jump past its revenue target for the first quarter by up to a possible 15% margin. Earnings per share figures will also likely benefit, but to a lesser extent due to higher production costs.
Let’s not forget some of the hard numbers as well. For the month of March, Fitbit stock is up 22% — pretty remarkable considering that in the week-long period following March 22, shares in the fitness-tracking company took a hit following a public relations headache. That is, news got out that an ongoing patent dispute between Fitbit and smaller rival Jawbone Inc. took a turn for the ugly, with the latter launching accusations of trade secret theft.
It’s certainly a distracting circumstance Fitbit investors could do without.
Fitbit Stock: Putting Everything Into Perspective
The technology sphere was, is, and will always be competitive. Apple Inc. (AAPL) and Microsoft Corporation (MSFT) have engaged in questionable business practices, yet no one disputes their contributions to the industry. Fitbit has faced far steeper challenges (as another wearable tech device in an already saturated market) — and yet it produces enviable financials. More importantly, it appears that the smart money is slowly catching on.
So what’s the secret behind the recent turnaround for Fitbit stock? Presently, the company is a classic contrarian opportunity. FIT is obviously well off its all-time highs, yet the company is still hated by most Wall Street traders — a short interest of 86% attests to that. Institutional ownership, however, has jumped three-fold since the FIT IPO. Against the steeply discounted price, more fund managers are willing to take a shot on the trendy tech company.
It’s easy to see why that would be the case. Fitbit stock trades at nine times forecasted earnings, significantly below the industry average. But unlike the litany of cheap stocks carrying similar multiples, this figure actually means something for FIT.
During its young lifespan, Fitbit’s gross sales blew up exponentially. Morgan Stanley’s latest report confirms that demand is still as hot as a ghost pepper dipped in Sriracha. Earnings, then, will likely follow suit.
Critics may argue that overhead costs have historically risen at a faster pace than revenue. While that’s true, consider that it’s easier to trim the top-line to get to the bottom-line, rather than trimming the bottom to get to the top. There are few things sadder in the markets than a company laying off its workers because its pool of consumers are stagnating.
That’s definitely not the case with Fitbit Inc: The company has no debt on its books (an increasing rarity in the markets) and is buoyed by industry-leading profitability margins, which have paid off in superior earnings reports. When first-quarter results are released around late May, it will take a brave trader to bet against FIT not hitting its two-cent target.
The recent turnaround in Fitbit stock may be the starting foundation of a stronger rally. Quite frankly, FIT is one of the few names in the markets that investors can get excited about. There is stability in the balance sheet, the company runs a very profitable business and both consumers and retailers can’t get enough.
In my opinion, it’s only a matter of time before the retail enthusiasm translates into generous returns.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.