When Fitbit Inc (NYSE:FIT) first came public, it seemed like a no-brainer to jump in. The valuation was surprisingly reasonable, growth projections looked good and FIT was profitable. Fitbit stock priced its IPO at $20 per share in mid-2015 and it quickly shot into the $30s. Within a month it was trading in the mid-$40s.
While FIT stock more than doubled from its IPO price, those first thirty days marked its best. Shares went on to cascade lower, falling about 90% since August 2015. With shares now trading at a lowly $5.75, is it time to buy Fitbit stock?
I want to say, “yes, Fitbit stock is a total buy in the $5 range!” Unfortunately, I can’t. The positives are getting compelling, though. Sporting a $1.3 billion market capitalization, FIT has $301 million in cash, $706 million in cash and short-term investments, and no debt.
Fitbit recently introduced its Alta HR product, the slimmest wristband with continuous heart rate tracking. Management also went through a shake-up and implemented a new business realignment. Considering the struggles the company has had, new leaders and a fresh focus seem like good ideas.
Sounds good, right?
Why You Should Avoid Fitbit Stock
There are obvious positives going for the stock, as mentioned above. Considering FIT stock’s 90% decline over the past 20 months or so, the risk/reward doesn’t seem all that bad.
But it’s just too hard to get behind the company right now. For starters, analysts expect FIT to lose 35 cents per share this year and 20 cents per share in 2018. Following an unprofitable 2016 campaign — losing 12 cents per share — two more potential years of losses isn’t very attractive.
In 2016, Fitbit generated $2.17 billion in sales. This year, FIT is expected to ring in $1.6 billion in sales and just $1.7 billion in 2018. It doesn’t help that Fitbit is seeing increased competition from Apple Inc. (NASDAQ:AAPL), Garmin Ltd. (NASDAQ:GRMN) and Samsung Electronic (OTCMKTS:SSNLF).
Simply put, Fitbit stock is an unfit investment, because its business clearly hasn’t bottomed. Sales and earnings will both fall below 2016 levels. Based on expectations, 2018 won’t surpass 2016’s results either. When I’m looking to put my hard-earned money to work, I want it in companies that have excellent businesses and a strong track record.
For Those Willing to Speculate on FIT
You could make a case for owning Fitbit stock. I’m not trying to be passive aggressive here. My message is clear: I don’t like Fitbit’s business and therefore would not buy FIT stock. But sentiment is another matter.
Undoubtedly, some investors like bargain-basement deals and a cheap stock price. They are willing to get in now, risking that Fitbit stock falls from $5.75 to $3 to capture a potential rebound to $12, $15 or possibly even higher.
Admittedly, the risk-reward sounds pretty good. Management guided for $1.5 billion to $1.7 billion in revenues this year. Again, this is below 2016 results, but gross margins of 42.5% to 44% tops the 38.9% gross margin Fitbit had in fiscal 2016.
Reducing expenses and streamlining the business is step one. Juicing sales is step two. Herein lies the problem, though. Fitbit has always struggled from an execution standpoint. Be it inventory management or having the right product at the right time.
If — and this is a big if — management can curtail its executional blunders and regain some momentum, Fitbit stock will likely bottom this year. For speculative buyers, maybe this is a level they feel comfortable buying at when sentiment is near its worst.
Personally, I would rather buy Fitbit at $8 or $10 once it’s confirmed management is executing and the business is rebounding. Buying on confirmation of a improvement rather than buying and hoping for one has served me better in the past. Even if that means I’ve missed out on initial gains from the rebound.
For now, Fitbit is not a buy in my view, but it’s also not a short, either.
As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
