Fitbit Inc (NYSE:FIT) will report second-quarter earnings after the bell closes on Tuesday.
Looking back over the last year, earnings have always been a dreadful day for Fitbit stock owners. That’s mostly because of the frustration it causes. FIT has beat expectations and raised guidance in just about every quarter since going publish last year. Yet, FIT stock almost always responds with a double-digit drop.
While it may seem like there is nothing Fitbit can do to please Wall Street, there are two big reasons why this might finally be the quarter that sends Fitbit stock soaring.
Q2 Expectations Are Low
When Fitbit reports second-quarter earnings, the market expects revenue of $578 million, an increase of 44.5% year-over-year. Then, Fitbit’s revenue growth for the third quarter is expected to decelerate significantly, to just 22% and revenue under $500 million.
At the very least, Fitbit should have no problem issuing guidance that meets these low Q3 revenue expectations. However, it might once more up guidance, especially if a product launch comes with a Q2 earnings announcement.
Finally, the bar could not be lower for EPS. Fitbit is expected to earn $0.11/share. That represents a huge reduction from what analysts were expecting three months prior, $0.26/share.
If you remember, it was Fitbit’s Q2 guidance that sent shares crashing lower after its first-quarter beat. Ironically, Fitbit’s full-year revenue and EPS outlook beat the consensus, yet the market chose to focus on the coming quarter after Fitbit disclosed plans to up spending in the second quarter.
In other words, the stage is perfectly set with low EPS and Q3 revenue expectations for yet another beat and raise quarter.
Fitbit Gives Investors What They Want
Just recently, I explained that Fitbit performs very similar to Facebook Inc (NASDAQ:FB), whose operations have driven its stock to become one of the most valuable companies in the world. Fact is, Fitbit is a very impressive company when it comes to growth, beating expectations and issuing guidance. However, as explained, the problem is Fitbit’s business model, and the narrative that subscriptions and services in technology drive long-term growth and performance.
As is, Fitbit stock owners are always looking ahead to the next product launch and the length of refresh cycles as a long-term concern. Hence, Fitbit desperately needs a new revenue channel, and needs to show investors that its future does not depend on one-time product sales year after year.
That said, Fitbit launched the Blaze back in Q1, and has now had five months with it on the market. In fact, Fitbit should be prepping its next smartwatch soon, which leads into the second reason Q2 may be different.
Instead of the focus entirely on product sales, Fitbit might very well turn the conversation to growing subscriptions and services revenue.
Keep in mind, the launch into smart wearables creates a new services and software business, as Fitbit sells Premium memberships and FitStar services. Notably, these are only possible with the use of Blaze and other smart wearables.
With Fitbit selling over 2 million Alta and Blaze wearables in Q1, recurring revenue from Fitbit’s “Experiences” are seemingly endless, with Fitbit just now tapping into what’s possible with this segment.
The big unknown is whether Fitbit will disclose Experience revenue, or whether it will launch a new smartwatch with Q2 earnings to further accelerate recurring revenue growth.
That said, if Fitbit goes this route, and talks up Experiences after having five months to create members and subscribers, rest assure Fitbit stock will be higher after earnings. I view the chances of Fitbit going this route as more likely than not due to the Blaze’s maturity and ongoing adoption.
If so, FIT stock goes higher.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
