When your stock is upgraded but the analyst doing the upgrading establishes a price target below its present price, is it really an upgrade? That’s a question Fitbit Inc (NYSE:FIT) investors are asking themselves this week, in the wake of an upgrade from Pacific Crest that now rates Fitbit stock as a “Sector Weight,” but suggests the stock’s appropriate value is $8. FIT stock is currently trading near $9.
The mixed message isn’t quite as surprising as it may seem on the surface. That is, Fitbit stock offers prospects and a valuation typical of its peers in the wearable technologies space, and that market isn’t as red hot as it was once touted to become.
Whatever the case, FIT stock is still more of a liability than anything else, and there’s little hope that’s ever going to change.
What the Analyst Really Said About FIT Stock
Just for the record, Pacific Crest analyst Brad Erickson fleshed out his call, explaining:
“Our bias remains negative, but significantly more skepticism is now priced in; upgrading to Sector Weight. With the stock now trading at 0.8x EV to our 2017 revenue estimate, investors are better appreciating the decelerating growth Fitbit is seeing, which prompts us to upgrade to Sector Weight. We wouldn’t expect substantive data points either way until Fitbit’s likely February Q4 report. Thus, the risk/reward for remaining short at current levels has become less favorable, in our view.”
If the best thing the analyst says is that the prospect of remaining short on Fitbit stock isn’t quite as compelling as it used to be, that’s not a good thing.
Quantifying the qualitative assessment Erickson made, along with the company’s disappointing third-quarter numbers, FIT forecasted that its Q4 top line (currently underway) would only grow between 2% and 5%. That will be the company’s slowest growth rate ever. Worse, earnings are expected to fall for Q4.
Things are expected to get worse for Fitbit stock before they get better too. Pacific Crest thinks revenue is going to fall a little more than 6% in 2017.
It’s not a terribly tough outlook to believe. Although smartwatches and wrist-worn fitness trackers launched with a great deal of fervor, that interest faded quickly. Once “the” consumer-tech item to buy, smartwatches only appear at the top of 3% of this year’s holiday gift wish-lists. As Jim Cramer put it a couple of weeks ago, “I think that everybody who wants a Fitbit has one.”
There is no upgrade cycle either. Indeed, most owners stop wearing their Fitbit within a few weeks of buying or receiving them.
Never Meant to Be (For Long)
The collective metrics explain why faithful owners of FIT stock can’t afford to get their hopes up. Then again, there are well-reasoned qualitative reasons too.
In the same vein as Cramer’s assessment, Erickson added “We think fitness trackers are hitting saturation in developed markets, with opportunities in emerging geographies appearing much more limited, at least for Fitbit-like price points.” Erickson was alluding to names like Garmin Ltd. (NASDAQ:GRMN), which makes similar fitness trackers at a lower price point.
And to the extent consumers are willing to pay a little more, a smartwatch jointly developed by Apple Inc. (NASDAQ:AAPL) and Nike Inc (NYSE:NKE) can be purchased starting at less than $400, while a some Series 1 watches now sell for less than $300. They may cost a little more than the higher-end Fitbits, but they do considerably more.
It’s this middle-of-the-road approach that has contributed to the company’s oversized weakness. As the Motley Fool’s Leo Sun made the point, “Its scattergun strategy isn’t hitting the right niches.” In fact, it’s not hitting any niches at all … that, plus the fact that the novelty wore off pretty quickly.
Bottom Line for Fitbit Stock
Kudos to Fitbit CEO James Park for taking a neat idea and turning it into a market-leading product. It was a product, however, with overestimated marketability and underestimated competition.
In that regard, FIT joins the ranks of big-time disappointments GoPro Inc (NASDAQ:GPRO) and Groupon Inc (NASDAQ:GRPN), both of which had a great story, but neither of which ever had a prayer of living up to the hype. In retrospect, the early buzz was mostly the result of an effort to drive a successful IPO, and hope from investors that they’d found “the next big thing.” They didn’t.
That’s not to say there won’t be a company called Fitbit a year from now. It is to say, though, FIT stock doesn’t have any real long-term upside worth trying to plug into. A poor Q4 performance could nail the coffin shut, so to speak.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.