Fitbit Inc (FIT) stock was hammered following the company’s first quarter results last week, and it wasn’t without reason. The company’s management guided its second quarter expectations meaningfully below the Street’s expectations.
But what FIT stock holders seemed to ignore was the bigger picture.
Fitbit management guided full-year earnings to a range of $1.12 to $1.24 on revenue of $2.6 billion. By comparison, Wall Street analysts were expecting the company to earn $1.13 per share on revenue of $2.46 billion.
It’s a fair argument that Fitbit’s disappointing second-quarter outlook is a one-off — that full-year guidance shows the true growth story underneath.
The pessimistic reaction makes sense. Bullish and bearish investors alike can agree that FIT stock is a “show me” story — the company has to prove it’s more than hype, and that its products can continue to sell, and that its leadership in wellness tech is sustainable over the long-term.
But one thing is for sure: Despite what Trip Chowdhry of Global Equities Research believes, Fitbit stock is far from a “piece of junk.”
Apple vs. Fitbit? Pricey Apples to Cheap Oranges
Chowdhry, clearly a Fitbit uber-bear at this point, doles out a flawed argument that includes the idea that Apple Inc. (AAPL) is a Fitbit killer.
As it stands, Fitbit is the market leader, according to IDC data. However, the analyst expects this to change in a few years because of the Apple Watch, which is a multi-purpose, multi-occasion device with “killer use-cases.”
But the argument misses a few points.
The recent release of Fitbit’s 2 new devices, the Blaze and Alta, drove an 18% increase in the company’s average selling price, which is outstanding, and should help FIT stock continue its three-quarter streak of beating revenue estimates.
And even then, that average selling price is only $100 — that compares to an average Apple Watch selling price north of $500.
Apple consumers are increasingly saying no to expensive devices. According to Neil Mawston of Strategy Analytics, Apple’s market share in the smartwatch segment dipped to an estimated 52% in the first quarter of 2016 from 63% just a quarter ago, giving way to cheaper alternatives.
At the same time, consumers are increasingly saying yes to Fitbit’s devices, which not only sell at various price points but all sell for well below $500.
Maybe customers don’t need the ability to check Instagram during an intense workout.
Chowdhry also missed the fact that Apple is basically shut out of the extremely lucrative corporate wellness category given the extremely high price tag of the Apple Watch.
Meanwhile, Fitbit Wellness VP Amy McDonough testified in front of a congressional hearing titled “Innovations in Health Care: Exploring Free-Market Solutions for a Healthy Workforce.” And Fitbit’s management said in its post-Q1 conference call that it is currently working with over 10 of the top 100 benefits brokers in the U.S.
There’s no doubt that corporate wellness initiatives are going to keep trending upward, but companies are companies, and they mind the bottom line. That means they’ll certainly at least consider a $100 device from the first name in wellness tech vs. a $500 device that also comes with a lot of distracting, non-health apps.
Chowdhry No Fan of Apple Himself
For what it’s worth, this supposed bringer of Fitbit’s doom falls under the umbrella of a management team that Chowdhry himself doesn’t like.
According to Chowdhry, Apple CEO Tim Cook has overseen the rise of a “bozo culture” that has destroyed hundreds of billions of dollars of shareholder value.
That includes Jeff Williams, who oversees the Apple Watch. And what does Chowdhry think of him?
“Jeff Williams can go back to his Procurement role.”
FIT Stock Will Be Just Fine
Fitbit is suffering the same fate that many hot tech IPOs go through: a stock decline as the hype wears off and the market figures out how to value the actual business. While people might think of Twitter Inc (TWTR), which never kept its footing for long after its offering, perhaps they should think of Facebook Inc (FB), which lost roughly half its value in just a few months before exploding to become one of Wall Street’s best stocks.
Ultimately, Fitbit should be fine. After all, FIT is a dominant player in a market that’s only beginning to take off. Per IDC’s Research Manager for Wearables, Ramon Llamas, back in February:
“Since wearables have yet to fully penetrate the mass market, there is still plenty of room for growth in multiple vectors: new vendors, form factors, applications, and use cases. This will help propel the market further.”
The wearables market is big enough that many players can compete at various price points. If Apple wants to dominate the uber-high end of the space, where people are looking for their wristwatch to do everything, it can have it.
FIT stock can do just fine if Fitbit merely continues to dominate the low end of the market.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
