Barely a pulse on the Fitbit Inc (FIT) price chart hints at a pending “surge” in the weeks ahead. And for bullish investors, an out-of-the-money vertical in Fitbit stock is well-priced for the situation.
Since going public in 2015, health and fitness wearables outfit Fitbit has been a classic battleground between enthusiastic bulls and less optimistic, but profitable (to this point) bears in Fitbit stock.
Fitbit Stock Bull Case
Backing bulls, FIT stock offers first-movers advantage into corporate wellness programs, top branding recognition and the largest market share within the wearables market at 36%.
Fitbit also offers a diverse product collection for a wide range of budgets and lifestyles. The lineup has undoubtedly helped with Fitbit’s strong popularity in key and varying demographic groups and should assist with building larger market share as more people utilize wearables technology.
While none of this has helped with the popularity of FIT shares, Fitbit stock is also profitable.
Unlike many hot IPO’s supported by buzzwords and future growth prospects, FIT trades at a 70% forward multiple discount of 10 times earnings versus the S&P 500’s price-earnings ratio of 17.
What’s more, despite reduced guidance, which sent shares plummeting to all-time-lows, forward five-year growth estimates of nearly 20% have Fitbit stock trading at both a growth and industry discount within a burgeoning market niche.
Fitbit Stock Bear Case
For the disbelieving bear contingency, which has manifested itself into short interest of nearly 30% in Fitbit stock, the story is a bit simpler.
The bear argument rests largely on Fitbit having its lunch eaten by competitors like Apple Inc. (AAPL), Garmin Ltd. (GRMN), Nike Inc (NKE), Under Armour Inc (UA) and Samsung Electronic (SSNLF). In truth, this strategist gets the bear case against Fitbit stock.
At the end of the day, an early advantage in a growth market like wearables, isn’t a guarantee of future success for Fitbit stock. With formidable competitors like Apple in the mix, one only needs to remember Blackberry Ltd (BBRY) and how well that initial lead worked.
Yet, shares of Fitbit stock are cheap until proven differently. And with FIT’s market cap, almost laughably less than BBRY’s, and a chart gearing up for an explosive resolution, there’s extra incentive to side with bulls right now.
Fitbit Stock Daily Chart
Click to Enlarge As noted, bears have undoubtedly been on the right side of positioning since Fitbit stock went public in 2015, but we think the next significant move will be higher.
Looking at the daily chart of FIT, our eyes are drawn to the Bollinger bands that have narrowed to their tightest levels since going public last year.
Ultimately, there will be a price resolution and an opening up or expansion of the Bollinger bands as Fitbit stock’s current and abnormally low volatility environment reverts toward more normalized price swings. This strategist believes the current technical platform will provide a meaningful upside reaction in FIT, rather than lower prices.
Supporting our view, a higher low contraction pattern, supportive stochastics and opportunity to “fill the gap” assisted by high short interest have us siding with more optimistic Fitbit stock bulls in this situation.
Fitbit Stock Bull Call Spread
Reviewing the Fitbit stock options board, the out-of-the-money August $15/$17 bull call spread for 50 cents is attractive with shares at $13.95.
This FIT spread is positioned to begin building intrinsic profits just above the tightened upper Bollinger band as (or if) Fitbit stock breaks out and begins to fill the price gap.
Looking a bit more optimistically at the vertical, should the Fitbit stock’s gap get filled and shares remain above $17 at expiration, this trader can realize a profit of $1.50 per spread and return of 300% in just over two months.
Lastly, the flexibility of this Fitbit stock vertical shouldn’t be overlooked. Coupled with liquid one point strikes, this FIT trader has plenty of alternative adjustments to lock in profits, reduce risk and/or ride the trend higher.
Investment accounts under Christopher Tyler’s management currently own positions in Under Armour (UA) and its derivatives. Mr. Tyler also proudly wears a Garmin Fenix 2 watch. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.