Calling a spade a spade, Fitbit Inc (NYSE:FIT) has been little more than a big fat bust. Although the euphoria surrounding the company leading up to and shortly after the company’s mid-2015 public offering was palpable — catapulting FIT stock from its IPO price of $30.40 to a high of $51.90 eight weeks later — the stock’s retreat to the current price near $5 is a reflection of the growth it was supposed to achieve but never did.
Still, with Fitbit stock knocking on the door of new record lows and the company still being the big name in wearable fitness trackers, might now be a time to wade into the bargain-priced stock?
That’s certainly the way traders saw it after Wednesday’s closing bell rang. FIT stock jumped more than 6% in after-hours trading in response to the company’s relatively good second-quarter numbers.
Fitbit Earnings Recap
For the quarter ending in early July, Fitbit reported an operating loss of 8 cents per share on revenue of $353 million. It was a victory in the sense that analysts were expecting Fitbit to post a loss of 15 cents per share of FIT stock on revenue of $341.6 million. But, it was a loss in the sense that the numbers extended and even accelerated a wave of slumping sales and widening losses. The company drove $586.5 million in sales for the same quarter of the previous year, and mustered an operating profit of 12 cents per share.
U.S. sales were the soft spot, where revenue fell 55% year-over-year. Overseas markets saw sales growth. Total unit sales of 3.4 million was down 40% YOY.
Fitbit CEO James Park said of the weakening results:
“Consumer demand in the second quarter was better than anticipated, enabling Fitbit to reduce channel inventory and generate better sales. We are executing according to our transition plan and have increased confidence in achieving our full year results.”
For the quarter currently underway, the company is looking for revenue of between $380 million and $400 million, which should be enough to pare the per-share loss back to something between 5 cents and 2 cents per share. Analysts had been modeling an average loss of 5 cents per share and sales of $393.1 million.
For the full year, Fitbit is expecting a loss of between 40 cents and 22 cents per share, on revenue of between $1.55 billion and $1.7 billion. The pros had been calling for a loss of 35 cents per share of FIT stock and revenue of $1.6 billion.
Guidance that was merely in the ballpark of consensus estimates was a pleasant surprise, helping boost the stock following the release of the report.
FIT Stock: Lost Cause?
It would be inaccurate to say the poor Q2 results prod fears of the worst for Fitbit; most investors were already well aware the company was imploding. It would be more accurate to describe the second-quarter report as one that underscores what most have already accepted. That is, FIT is a lost cause.
With FIT stock down 90% since around this time in 2015, clearly Fitbit hasn’t lived up to expectations.
Investors may recall the mania around the time of the company’s IPO. Wearables were the market’s next big thing, and although the Apple Inc. (NASDAQ:AAPL) smartwatch was in the works, Fitbit bands were already on the market, allowing people to measure just how physically active they were on any given day. With Apple’s take on wearables likely to be prohibitively expensive anyway, Fitbit was all the rage.
The rage didn’t last long, however, with the company running into a myriad of reputation and functionality problems.
You may recall the company came under fire shortly after it went public when it was determined that its pulse-rate sensors were alarmingly inaccurate. Separate studies determined that the heart rate measured by its PurePulse fitness trackers were off by as much as 20 and perhaps off by as much as 30 beats per minute … enough to put some users into a heart attack red zone without them knowing it.
More than anything though, fitness trackers were quickly recognized as a fad, not driving the second and third ‘upgrade’ purchases that keep Apple’s iPhone out in front of the smartphone race. The specifics: 15% of users abandon their fitness tracker after 30 days of use, and 42% of users stop using the device after six months. In time, half of those owners shelf them for good.
Fitbit can change and revamp its products all it wants, but it can’t change human tendencies.
Still, 38% of last quarter’s product activation were done by repeat customers, suggesting the company has something of a loyal base to help drive sales growth.
Smartwatch
Fitbit has been working to combat the waning-interest headwind by developing a smartwatch designed to compete with those made by Apple. Indeed, the company has recently confirmed it will work with third-party apps, which will be available at a Fitbit app gallery.
It’s an interesting development to be sure, though too little, too late. Apple has the bigger-name recognition advantage as well as an established app/user ecosystem. Fitbit is years behind in that regard, trying to break into a market (1) against much bigger players, and (2) that doesn’t have room for another player anyway.
Park is still optimistic though, commenting:
“Our smartwatch, which we believe will deliver the best health and fitness experience in the category, is on track for delivery ahead of the holiday season and will drive a strong second half of the year. In the long term, we are confident in our vision for the future and are uniquely positioned to succeed by leveraging our brand, community, and data to drive positive health outcomes.”
Bottom Line for FIT Stock
Nobody would deny that Fitbits are a clever idea, melding multiple technologies into one easy-to-use package. At the end of the day though, it was a solution to a problem that didn’t really exist … at least not in the way Fitbit thought it did. Most consumers love the idea of being more physically fit. Most of those consumers, however, aren’t all that motivated to do something about it.
The introduction of a full-blown smartwatch is the next natural evolution of Fitbit, but doesn’t necessarily make FIT stock a worthy investment. With Fitbit and Apple validating the idea of wearables, other players are now entering the space … a space already well occupied by Apple. It’s unlikely Fitbit will be able to make a meaningful dent in that market, even though traders clearly turned optimistic in the wake of the Q2 report. Only time will tell how long that enthusiasm lasts.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
