Shares in Fitbit Inc (NYSE:FIT) rebounded Friday after collapsing the day before on a horrendous holiday forecast, but odds are this is just a dead cat bounce for FIT stock.
The wearables market is delivering piles of evidence that it’s strictly niche. That’s something the market has suspected for a while. Witness the roughly 60% drop in FIT stock this year even before it tumbled yesterday. The company’s most recent quarterly report only helps confirm that wearables are not going to become a mass-market gadget.
Here we are on the cusp of the holiday selling season — the most important time of the year for a company like FIT — and the company is already predicting it will get a lump of coal. Its profit and revenue forecasts for this critical holiday shopping quarter was well below Wall Street’s forecast.
FIT expects fourth-quarter revenue to come in between $725 million and $750 million, down from previous estimates of $985 million. Earnings per share are now pegged at 55 cents to 59 cents a share. That’s a whopping cut to the prior outlook which stood at EPS of $1.12 to $1.24 a share.
Sure, production issues with its new Flex 2 wristband get part of the blame. The killer, however, is soft demand. Analysts were quick to cut their price targets and rating on the name.
Wall Street Gives FIT a Thumbs Down
For example, Cowen Research analysts slashed their target price in half to $9. That leaves a few percentage points of implied upside, which helps explain why Cowen maintained a rating of “market perform” (hold, essentially.) SunTrust Robinson Humphrey downgraded FitBit stock to “hold” from “buy,” while Wedbush lowered it to “neutral” from “outperform.” Citigroup and Piper Jaffray were among the several other research shops either cutting price targets or ratings on FitBit stock. This is from a note to clients of William Blair equity research:
“Fitbit reported a mixed quarter, missing the Street’s estimate on revenue though exceeding the consensus estimate on EBITDA. The stock is down over 25% in after-hours trading, as the company provided guidance for the seasonally strong fourth quarter that was well below consensus estimates. As a result, full year 2016 revenue, EBITDA, and EPS guidance was also guided considerably lower and well below our model due to several factors. Most notable is the softer-than-expected demand for new products, specifically the Charge 2 and Flex 2. Moreover, the company experienced a supply disruption with its Flex 2 product that led to waste and gross margin degradation that is expected to persist through the fourth quarter. Over the longer term, we continue to have concerns over competitive pressures and uncertainty with Street estimates given the company’s dependence on new products for growth.”
Indeed, a major issue for FitBit is competition for what’s proving to be a niche market. The company is going up against gadget giants like Apple Inc. (NASDAQ:AAPL), Samsung Electronic (OTCMKTS:SSNLF) and Garmin Ltd. (NASDAQ:GRMN).
It’s possible that FitBit could revive its fortunes with new form factors or capabilities, but then it’s no trouble for competitors to follow.
So what’s with the pop in FIT stock? Shares crashed 33% in Thursday’s session to hit an all-time low. Short sellers might be closing their positions today. Perhaps technicians are taking a cue from the fact that FIT stock is oversold.
Either way, any hope for FIT has been pushed deep into next year. SunTrust Robinson Humphrey had this to say in a note to clients:
“We think demand for current product feature set may be saturated, and at this point, only new product form factors and functionality could inflect demand, which we don’t expect until well into 2017. Further, on valuation multiples versus other CE manufacturers, the stock does not appear undervalued.”
Bottom Line for FitBit Stock
You have to be both very optimistic and very patient if you expect a rebound in this company’s business. Surely there are more prudent ways to deploy your capital.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
