For the year so far, there has been little good news for Fitbit Inc (NYSE:FIT). But in early August, there was something to cheer about: the quarterly report. On the news, FIT stock shot up about 15% to $5.82.
In Q2, the company posted revenues of $353.3 million and an adjusted loss of 8 cents a share. As for the Street, the consensus was for a net loss of 15 cents on FIT stock and the top line to come in at $341.6 million.
The guidance for the third quarter was also encouraging. Consider that the company is expecting a loss of 5 cents to 2 cents and revenues of $380 million to $400 million. By comparison, analysts forecast a loss of 5 cents and revenues of $393.1 million.
Yet, the biggest positive for the quarter was that Fitbit plans to launch its smartwatch for the upcoming holiday season.
Despite the recent good news, I still think there are considerable risks. So here’s a look at three:
FIT Stock Problem #1: Financials
Even with the better-than-expected Q2, the financials are still far from solid. After all, revenues dropped about 40%!
And has come after several other quarters of steep declines. During Q4, the revenues fell by 19%, even though the company launched several new products. Then there was a 41% plunge in Q1 as the number of devices sold fell from 4.8 million to 3 million.
Granted, FIT does have $675.7 million in the bank and there is also no long-term debt on the balance sheet. But this cash position could quickly evaporate if the losses continue to pile up.
FIT Stock Problem #2: Product Development
When it comes to R&D, FIT is no a slouch. From 2012 to 2016, the expenditures spiked from $16.2 million to $320.2 million.
Unfortunately, the issue is that FIT has not spent this money well. The company has focused too much on fitness/activity trackers, which have become more commoditized. What’s more, consumers want broad-based wearables like a smartwatch.
As a result, Apple Inc. (NASDAQ:AAPL) has been able to take advantage of the opportunity. In fact, by the fourth quarter, the company will have its third generation model on the market.
This really should be scary for shareholders of FIT stock. No doubt, AAPL has a host of major advantages, such as a global brand, a massive customer base, a thriving App Store and a huge marketing budget.
As for FIT, it will somehow have to find ways to rise above the noise. After all, the company will not only have to deal with AAPL but also tough rivals like Garmin Ltd. (NASDAQ:GRMN), Samsung Electronics (OTCMKTS:SSNLF) and various low-cost operators.
FIT Stock Problem #3: Competition
According to IDC (International Data Corporation), FIT has been losing ground in the wearables market. During the latest quarter, Xiaomi and AAPL were roughly tied in global market share (at about 14.6% or so). However, as for FIT, there was a 38% drop to 12.3%.
Here’s what IDC’s Ramon Llamas had to say: “Fitbit finds itself in the midst of a transformation as user tastes evolve from fitness bands to watches and other products. This allowed Xiaomi to throttle up on its inexpensive devices within the China market and for Apple to leverage its position as the leading smartwatch provider worldwide.”
In other words, the Fitbit brand could be in jeopardy as the company gets marginalized. This is actually something that is common in the device industry. Just some of the stark examples include BlackBerry Ltd (NASDAQ:BBRY), Palm and Nokia Oyj (ADR) (NYSE:NOK).
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.