If the market has proven one thing, it’s that no matter how many devices Fitbit Inc (FIT) sells, no matter how much profits rise and no matter how fast revenue grows, Fitbit stock will go lower.
When you consider what Fitbit has done since its IPO, which includes non-stop revenue and earnings per share beat-and-raise quarters, FIT stock’s performance can be very frustrating, and certainly confusing to anyone who does not understand what’s currently driving technology stocks higher.
Fact is that no technology stock that relies solely on hardware sales is performing well right now. Investors don’t trust product sales. They want to see subscriptions, software and diversification into multiple businesses because of the uncertainty that surrounds sustainability.
While I think Fitbit has proven that it is head-and-shoulders above all others in wearables, Wall Street continues to doubt it, which is why Fitbit must deliver in one specific area to reverse its bad fortunes. If so, the stock will soar.
FIT Needs to Make a Splash in Apparel & Services
It has not been a month since I said that Fitbit must become more complicated. Investors should not be able to multiply the number of units sold times its average selling price to arrive at total revenue.
Because while Fitbit executives may think that creating half of last quarter’s revenue from its two newest products is a good thing, it is actually a concern for investors who worry about the company’s ability to create the next “must have” wearable quarter after quarter.
Instead, Fitbit must have a large wearables, accessories, services and clothing unit. And just as importantly, it needs real endorsers of its brand.
Earlier this year, I watched the second overall pick of the NFL Draft, Carson Wentz, at Jon Gruden’s Quarterback Camp sporting a Fitbit Blaze the whole time. I wondered: Why isn’t Fitbit trying to sign him up as an endorser? Why isn’t he wearing Fitbit hats, shirts, shoes, etc.?
If Fitbit is ever going to break free of the negative stigma, it has to become a more mainstream and balanced company in the sports apparel and wearables space. And thankfully, it is finally starting to make that transition.
Not only did Fitbit unveil its latest ambassador in NBA player Harrison Barnes last month, but the company has also started to promote Fitbit Trainer and premium memberships on its desktop site, which consumers pay for monthly.
Fitbit has also gotten very creative with its accessories, offering more design options for wearables, scales, sleep devices, etc. This should be its own segment. When considering management statements at the end of last quarter that demand for new products has been very strong, it is very possible that accessories will be made its own segment.
Finally, Fitbit has slowly but surely started to rollout clothing. It’s selling hats, tees and tank tops … nothing fancy, but apparel nonetheless.
Why It’s Important for Fitbit Stock
However, Fitbit is clearly flirting with these other businesses that span beyond hardware sales. This will be its first quarter promoting the accessories, services and clothing. Remember, the services that Fitbit is offering go hand-in-hand with its Blaze smart watch. Therefore, investors don’t really know what to expect from sales, nor can we really gauge the demand of accessories or clothing.
That’s what makes this current quarter so important.
If Fitbit can produce growth in these new categories, it might just do wonders for the stock. People can then look at Fitbit as a software and services or Under Armour Inc (UA)-like company, and then all of a sudden Fitbit stock looks really cheap at just 10x forward earnings.
However, if Fitbit is unable to produce new software and services for its smartwatch, or if accessory and apparel sales fall flat, then investors should expect more of the same disappointment from FIT stock.
As of this writing, Brian Nichols owns shares of Fitbit stock.
