Fitbit Inc (FIT) is not your classic growth stock; FIT revenue grew at an impressive rate of more than 100% for the last three years, and it did so while delivering a modest profit margin of 6% unlike most growth stocks that lose money. Yet, Fitbit stock is behaving like a popped bubble.
Its stock price sliced by more than half in several months, followed by a burst of analysts’ downgrades. So, what the heck is going on with FIT stock? Should investors be worried?
Fitbit currently dominates the market of fitness trackers and does so by a wide margin. According to the tech blog 9to5Mac, Fitbit shipped 4.8 million units in Q1, compared to 1.5 million units by Apple Inc. (NASDAQ:AAPL). True, Fitbit stock is a niche stock, as the company targets those who wish to track their physical activity, unlike Apple, which delivers a more holistic experience with the Apple watch … getting calls and texting — it’s practically a smartphone on your wrist.
At first glance, there’s really no reason to worry about Fitbit’s future. However, a quick glimpse into the past tells a different story. Not too long ago, as many of us can recall, there was the MP3 player niche. But as MP3 players merged with smartphones, that niche all but disappeared.
The wearable market shouldn’t be any different. Eventually, users will want to be able to answer their phone while training or have the ability to send texts. That, of course, is already in the realm of the smartwatch — a realm with much bigger, and highly competitive, players, such as Apple and Samsung (OTCMKTS:SSNLF).
How FIT’s Move Backfired
No doubt, what has aggravated investors’ concerns was the response of Fitbit CEO James Park. In an interview with The Telegraph, Park was quoted as saying that the “[Apple Watch is] a great product, but it’s a product that probably does too much.” And he later explained that Fitbit and Apple target different niches.
But then, Fitbit issued its own smartwatch, the Fitbit Blaze, which is set to compete head-to-head with the Apple watch. That move effectively confirmed what investors had feared: the future of fitness tracking is the smartwatch.
So far, Fitbit Blaze is getting good reviews and it is moderately cheaper than the Apple Watch, selling for $199 compared to the Apple watch simple model that retails at $299. Moreover, it has a substantially longer battery life than the Apple watch. But the Fitbit Blaze is only a quasi-smartwatch; for example, it cannot send texts, let alone make phone calls or navigate your playlist as the Apple watch can.
Fitbit Stock Is Still in Trouble
At the moment, Fitbit stock trades at a 24x multiple after its selloff, which is still lofty considering the risks. It is unlikely FIT revenue can continue and grow at the same rate, with Apple and Samsung lurking. This has already been confirmed as Fitbit lowered its guidance for the second quarter.
If growth will be much slower and profitability possibly lower as a result, then FIT stock, while not necessarily a bubble (at current levels), does seem to be heading into further trouble.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.