Fitbit Inc (NYSE:FIT) shares have come off a post-earnings disaster low, but don’t expect much long-term upside in this name. It’s clear that FIT is selling a commodity product in a niche market and Fitbit stock is in trouble because of it.
Sure, production issues with its new Fitbit Flex 2 wristband get part of the blame for the company’s terrible quarter and miserable guidance ahead of the holiday selling season.
But that doesn’t explain the totality of FIT’s fall from grace. Whatever excuses the company wants to offer up, there’s no getting around the fact that there is only so much demand for this product and this brand. From a note by William Blair equity research to clients:
“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, much of the Street has lost confidence in this name. Downgrades came fast and furious in the immediate aftermath of earnings. Cowen Research analysts slashed their target price in half to $9, which is actually below what FIT stock trades for now.
Elsewhere, 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 firms cutting price targets or ratings on FIT stock.
Surprise: Fitbit Stock Isn’t an Earnings Machine
There’s simply much, much less to Fitbit’s bottom line than the Street first thought. Barclays recently cut FIT stock to “Equal Weight” from “Overweight”, and slashed its price target by more than half, $24 to $10. Here are some of their thoughts from a note to clients:
“We are decreasing our FY16 and FY17 EPS estimates to $0.59 and $0.45 from $1.25 and $1.45, respectively. While we continue to believe in the company’s products and longer term strategy, the underlying variability of its financial model and lack of visibility into new products have forced us to appropriately reflect this risk within our rating. Our new price target of $10, reflects 1.1x P/S and 22.2x P/E our FY17 sales and EPS estimates of $2.35 billion and $0.45, respectively. However, we note that given expectations of $900 million of cash that could materialize in 1Q17, our price target of $10, reflects 0.8x P/S.”
If the lack of confidence in FIT’s fundamentals wasn’t enough, the technicals remain poor too. Fitbit stock’s MACD points to more downside ahead even as the relative strength indicator says it’s oversold. Don’t forget — there’s always room to get more oversold.
The bottom line is that betting on a big comeback in FIT stock isn’t the best of ideas. Even if it somehow happens, you’ll be waiting a while. From a note to clients from SunTrust Robinson Humphrey:
“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.”
Your portfolio will thank you for finding something with a better risk-reward profile than Fitbit stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.