If there was ever a company that needs good news, and good news now, it would be Fitbit Inc (NYSE:FIT). Immediately after its introduction to the retail market, FIT made a pronounced impact on the health and wellness sector. More importantly, it became a cultural phenomenon thanks to the company’s quirky advertisements. But in the financial markets, Fitbit stock has lacked.
Sure, Wall Street piled into Fitbit stock during its initial public offering honeymoon phase. Between June 18 until Aug. 5 of 2015, FIT stock gained an extremely impressive 74%. Unfortunately, that only covers 34 trading days. Since then, Fitbit stock has become the antithesis of its consumer base: lethargic, unmotivated and … well, something that rhymes with “FIT.”
But with the once on-fire consumer tech firm releasing its fourth quarter of fiscal year 2016 results, will fortune shine on Fitbit stock?
Just by looking at the hard numbers, I wouldn’t hold my breath.
Tough Earnings for Fitbit to Swallow
Fitbit reported a Q4 loss of $146.3 million. Although the fact that FIT went into the red wasn’t a surprise, the magnitude certainly was. On a per share basis, Fitbit stock was expected by Wall Street analysts to mitigate negativity to 48 cents. Instead, losses adjusted for one-time gains and costs resulted in 56 cents of red ink.
The top line didn’t impress, either. For Q4, forecasted revenue averaged $575.8 million. In actuality, FIT stock managed $573.8 million, or a negative surprise of a little more than 0.3%. The margin of the miss isn’t so bad in and of itself. However, with so many critics taking aim at Fitbit stock, the company needed something spectacular on this front. Whatever this is, it just isn’t going to do the trick.
Although it’s not fair, the Fitbit earnings miss is exaggerated due to the fact that it’s the first one. According to CNBC‘s archives, prior to yesterday’s earnings report, the device maker leveraged an average earnings surprise of 103%.
One of the most prominent criticisms came from Jim Cramer. Appearing on CNBC’s “Squawk on the Street” segment late last month, Cramer suggested that FIT was a commoditized company. Once people buy the product, there is no compelling reason to buy again. And when you consider the sharp erosion in sales growth, it’s hard not to see this point.
To illustrate, quarter-over-quarter revenue growth in 2015 was 170%. In 2016, it has dropped to an alarming 25%!
Since they’re not killing it on profitability margins, FIT has drastic actions to take. At least to that end, management is making the right moves.
Easing the Minds of Fitbit Stock Buyers
Last month, FIT announced a series of layoffs, which will affect about 10% of the total workforce. The tech firm is hoping to save $200 million, which is a huge deal for its size.
We also have to reconsider this criticism of Fitbit stock as a “commoditized” investment. It’s both a valid and an invalid argument. You can literally say the same thing about Apple Inc. (NASDAQ:AAPL), Samsung Electronic (OTCMKTS:SSNLF), and Sony Corp (ADR) (NYSE:SNE). That hasn’t stopped them from making smart phones, tablets and cameras. The latter is a particularly good example of a widely distributed product continuing to find solid demand.
It shouldn’t come as no surprise that we live in a disposable world. Many of us couldn’t fathom driving the same car for more than three or four years. As long as FIT stock remains an innovation investment first, I don’t care about ancillary titles like commoditized.
And the company has a strong user base. Build those numbers, and Fitbit Inc can turn that frown upside down.
Finally, there is something to be said about hitting rock bottom. Fitbit is sitting at breakeven despite what otherwise was a pretty lousy report that also included negative guidance.
The bearishness seems completely priced in. I’m not guaranteeing a floor, but there are enough positives for Fitbit stock to begin recovering from here.
As of this writing, Josh Enomoto was long SNE.
