Fitbit Inc (NYSE:FIT) is back from the dead! Endless buzz about the company’s new Ionic smartwatch has the shares on a tear over the past month. In that time frame, FIT stock is up 20% versus a mere 3,3% gain for the S&P 500 Index.
The chart for this run looks pretty convincing. Indeed, it is the longest and largest rally FIT stock has had in about a year. The 50-day moving averages are starting to slope positive. The relative strength index, which is used to gauge whether a security is overbought or oversold, is at a one-year high and rapidly approaching overbought territory.
So is this sharp reversal in momentum for FIT stock justified? I don’t think so. This is just a big dead-cat bounce.
Here’s why.
Ionic Won’t Change Much For Fitbit
For the longest time, you’d have been hard-pressed to find a single FIT bull. It seemed common knowledge on the Street that the company was selling stuff that no one really wanted. Basic wearables are on their way out, rapidly being replaced by all-in-one, fitness-focused smartwatches.
See the success of Apple Inc. (NASDAQ:AAPL) versus the struggles of pretty much everyone else in this space.
But after the Ionic launched, a whole herd of bulls came out of the woodwork. Just look at the recent posts on InvestorPlace. If you just read the headlines, you would think FIT stock is about to take off like a rocket ship.
All this newfound optimism stems from hope that the Ionic smartwatch will turn the company’s dying business around.
But that’s not gonna happen. Why?
For one, Fitbit is just playing catch-up, like every other fitness tracker and traditional watch company. And catch-up is a game that hasn’t worked well in this space.
Fossil Group Inc (NYSE:FOSL) is trying to turn around its dying traditional watch business by pivoting into smartwatches. That hasn’t worked out so well. FOSL stock has gone from above $100 in January 2015 to under $10 today.
Meanwhile, Motorola Solutions Inc (NYSE:MSI) has had such big smartwatch troubles that it looks like they are just giving up. Pebble had to sell itself early. Jawbone didn’t even get to attempt a smartwatch turnaround. The fitness-tracker maker, which was once valued at $3 billion, has closed shop.
This is a tough space. And the only winner right now is Apple. How could the Ionic change that?
It can’t.
That brings me to my second concern. The Ionic smartwatch really isn’t anything new as far as smartwatches go.
It comes with many of the same bells and whistles as other smartwatches these days. It has built-in GPS, a heart-rate monitor, and is also water resistant. The aesthetic is also more of the same. The Ionic is thinner and lighter than the Apple Watch, but also wider.
A couple things do stand out. The display can be adjusted bright enough to be seen in direct sunlight. The battery is said to last for four days. And then there’s Fitbit Coach, which includes customized workout videos.
But those stand out features aren’t game-changers. Does anyone really care about adjusting a display bright enough to see it in direct sunlight? That seems like more of a gimmick than anything else. And who really needs a four-day battery life? All-day battery life, which the Apple Watch offers, seems more than sufficient. The workout videos are cool, but they cost extra.
Bottom Line on FIT Stock
All in all, the Ionic seems less built for competing against other smartwatches, and more built to eventually replace its own fitness devices.
Here’s how I see the situation. Everyone is ditching their Fitbit devices. In five years, simple Fitbit fitness trackers will be a rarity. Some of those people ditching their Fitbit devices will buy the Ionic watch, but others will just jump straight to the Apple Watch or another fitness-focused smartwatch. Meanwhile, first-time buyers will likely side with the Apple Watch over Ionic because of name-brand (sorry bulls, but Apple does have a much stronger brand and ecosystem than Fitbit).
The net result is that Fitbit loses a whole bunch of customers in the long run.
Ionic sales will inch up a bit, but traditional Fitbit device sales will go down a lot. That dynamic doesn’t really imply all that much growth from the $1.6 billion sales base expected this year.
But FIT stock is essentially trading at 1-times that revenue base despite running huge losses and having no clear sign to profitability.
I don’t like that set-up.
So I say fade this rally and look for value elsewhere.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
