The last time I talked about Fitbit Inc (FIT), I mentioned that the company’s early sales forecasts proved that the stock was attractive below $15. Clearly I wasn’t alone because shares rallied nearly 30% soon after.
Now that official earnings for the first quarter have hit Wall Street, we have confirmation that the numbers were even better than anyone expected — but the stock is still selling off.
If traders are selling on earnings news, then either their expectations were far out of line with Wall Street’s formal targets, or their expectations have changed. Fitbit stock blew consensus out of the water this past quarter, as the bar had been set extremely low.
Revenues totaled $505 million for the last quarter, a full 14% above analysts’ estimates, while earnings came in nicely higher at 10 cents a share versus the expected 3 cents a share.
At the same time, management keeps making an effort to raise the bar on their end, pushing the full-year earnings target up well above consensus of $1.12 to $1.24 a share. So if the trailing numbers are great and the future looks brighter than ever, FIT hasn’t changed for the worst.
Why FIT Is Still Fighting to Survive
What has changed is that traders who bought into FIT stock down at $12 had a lot of profit to take at $17, and I think they’re taking some of that money off of the table. A company like Fitbit can report better-than-perfect numbers, and traders will still sell the news.
Of course, that’s a major opportunity for investors looking beyond the quarter-to-quarter headlines. Any trader who missed FIT stock at $15 a month ago has a chance to buy it now with an even more robust cash stream at roughly the same price. It just requires a little confidence in the company’s products and in management’s guidance.
That might be too much to ask right now, which is understandable. While Fitbit’s earnings have blown Wall Street away every quarter, the cost of developing its newest fitness band, the Blaze, has been expensive enough to narrow profit margins by 3% last quarter.
Management says that margins should be back in order by the time the holiday season rolls around, but while revenue in the current quarter is tracking 6% to 10% above consensus, earnings look like they will come in about 15 cents below what traders currently expect.
That’s a lot of patience to have in a volatile market like this one.
FIT is trading around 11x current earnings and should be growing fast enough to remain an interesting stock below $17.75 or so. But I think what’s frightening traders here is the long view: 2016 looks fine for now, but visibility into 2017 and beyond gets murky.
The Blaze is selling better than anyone expected, so management seems to know their market better than Wall Street does. But as long as traders take their cues from the Street, Fitbit stock prices will take a long time to reflect the company’s actual value.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.