There’s no escaping the reality that last week was one of the ugliest for the technology sector, as GoPro Inc (NASDAQ:GPRO) almost went terminal after posting earnings and revenues well south of analyst expectations. Other notable tech names, including Facebook Inc (NASDAQ:FB) and Twilio Inc (NASDAQ:TWLO), performed terribly, but this was nothing compared to the disappointment of Fitbit Inc (NYSE:FIT).
In just one day, FIT stock lost more than 33% in the markets.
Just by sheer numbers alone, it exceeds the aforementioned tech disasters. But what makes Fitbit particularly jarring is that it showed a lot of promise. Admittedly, the implied valuation of its initial public offering was overstated by a wide margin.
But with an impressive array of products — most notably the Fitbit Surge — the company seemed to have found its footing. Since late February of this year, FIT stock was holding a horizontal trend channel supported at the $12 level.
Obvious Troubles for FIT Stock
Plenty of people will come out of the woodwork to declare that they knew it all along. Success for FIT stock hinged on its premium Surge smartwatch.
Virtually every other product in the Fitbit Inc lineup — Blaze, Charge 2, Alta, and so on — are derivatives of the flagship model. Only the low-end starter model Zip, and the smart scale Aria are structurally different. Even there, the Aria is the lone product that is fundamentally unique from the Surge derivatives.
When Fitbit reported its second quarter of fiscal year 2016 results last Wednesday, the primary numbers weren’t necessarily terrible. Earnings per share expectations were pegged at 19 cents, which FIT stock met. At $504 million, revenue jumped 23% from the year-ago quarter. However, it missed analysts’ more bullish consensus of nearly $509 million. The bigger distraction, though, is that sales from the Asia-Pacific market tanked. This implies that “fighter brands” such as Xiaomi are winning the price tag war.
It’s evident that the FIT management team see the writing on the wall — at least for now. For the critical holiday quarter, Fitbit Inc realistically expects revenue to come in a range between $725 million to $750 million.
That’s a massive drop from the over $981 million that Wall Street had forecasted. There’s no way that FIT stock could go unpunished when its best-case revenue guidance is 24% below consensus.
Strong Positives Still Exist for FIT
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There will be short-term trading opportunities on both sides of the fence, if people can stomach the volatility. But on a longer-term window, there are two factors that give hope for the bulls.
First, Fitbit Inc CEO James Park is transitioning the company into a “digital health company.” It’s an organic move that doesn’t conflict with its core Surge products, but makes FIT stock less vulnerable to consumer whims.
That’s especially important since Apple Inc. (NASDAQ:AAPL) is increasingly upping competitive pressure.
Definitely, it’s not a risk-free shift. Aggressively pushing into the medical technology sphere may catch the eye of regulatory agencies. Also, Fitbit’s heightened investments means that they have to succeed. However, early signs are encouraging.
The company has relations with health insurers to provide diabetes and weight management monitors. It also networks with several corporate wellness programs, where current sales are small but growing.
Second, the FIT stock disaster is inherently dissimilar to GoPro’s collapse. At the end of the day, a GoPro camera is only as exciting — and therefore, as useful — as the content it’s capturing. Most of us simply don’t live lives worthy of full HD treatment.
The Balancing Act for Fitbit Investors
But every single human being on this planet can benefit from good health. True, the nifty jingles that Fitbit produces market to the rugged and athletic twenty-something. The Surge, however, is one of the few devices that can be gifted to everyone. For Americans in particular, a FIT device is something that needs to be gifted generously and frequently. But a Hero5 for your accountant? — eh, not so much.
Unfortunately, the bottom line is that no one wants to hear about a reduced guidance, especially right before the holiday season. For that, I can see why FIT stock “deserves” its fate. I’m also pessimistic about the next few months as panic tends to generate more panic.
However, the future is a brighter prospect for FIT investors. Unlike pure consumer tech companies, Fitbit has a very real opportunity to expand its horizons. In fact, they’ve shown early success in health monitoring devices.
While it’s hard to find optimism amid the pain, we may look back on last week as a tremendous buying opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
