After Fitbit Inc’s (NYSE:FIT) short-lived IPO honeymoon with investors, it has been nothing but down and out for FIT stock.
The company pioneered the market for wearables. It was a promising market with huge growth potential. Wearing things that track your health and fitness data became the biggest fad in consumer tech. Consequently, investors thought FIT could become a leader in a secular growth market.
But that never happened.
Once Fitbit proved there was value there, bigger players with more reach and deeper pockets jumped into the game. They innovated where Fitbit didn’t, and now those bigger players control the market. Just look at how much success Apple Inc. (NASDAQ:AAPL) has had in the smartwatch market.
Now, FIT is trying to play catch-up, but that is tough when you are the smaller guy who is losing money every year. It’s also tough when everyone thinks of you as yesterday’s greatest hit.
Now, FIT stock languishes in the $5 to $7 range. It’s been stuck there for most of 2017, and it’s not going anywhere else anytime soon. Here are three big reasons why FIT stock is a sell here and now.
FIT Stock Failed to Rise On A Quarterly Beat
Fitbit’s most recent quarter was a classic case of “buy the rumor, sell the news.”
FIT stock had rallied big into the report on high hopes for the Ionic smartwatch, which launched in August. Investors bought into the rumor that the new smartwatch would catalyze a huge turnaround in the depressed growth narrative. From its August lows, shares of Fitbit had roared 24% higher into the third-quarter print.
The third quarter headline numbers beat across the board. Revenue and earnings topped expectations. The guide was also better than expected. But FIT stock fell because it wasn’t the type of quarter that spelled turnaround.
Revenues were down big. Units sold were down big. U.S. demand, usually a leading indicator of international demand, remained weak. Margins were still under pressure.
All in all, its usually bad news to see a stock failing to rise on a quarterly beat. Most of the time, it means investor demand remains depressed, and that this stock will need really good news to break out.
Unfortunately, there is no such news around the corner.
Demand Just Isn’t There
Last quarter, new products rolled out over the past 12 months (Alta HR and Ionic) accounted for 32% of revenues.
While that might seem good, it’s actually not that impressive. Overall, total revenues were down 22% year-over-year. In other words, the new products that are supposed to catalyze a turnaround are only accounting for a third of revenue on a hugely depressed revenue base.
Clearly, demand for new products isn’t that strong. What is the underlying reason for this relatively weak demand? Apple Watch, which just reported its third consecutive quarter of 50%-plus unit growth.
Meanwhile, if you back out that 32% of revenue from new products, third quarter revenue was just $266.9 million versus $503.8 million a year ago. That means on a comparable product basis, revenue is down nearly 50%.
Clearly, demand for old products is collapsing. What is the underlying driver? Same thing driving depressed new product growth. Apple and other big players are running away with this market and leaving Fitbit in the dust.
FIT Stock Is Approaching a Critical 2017 Resistance Level
Throughout 2017, FIT stock has been stuck in neutral between $5 and $7. Specifically, the $7 level has acted as a strong 2017 resistance. Whenever FIT stock approaches that level, it drops back to $6 and lower.
Right now, FIT stock is approaching this $7 resistance level. Consequently, even if you are just trading this stock, it doesn’t look like a buy here. Demand for FIT stock when its north of $6 has been weak for the past several months.
That won’t change anytime soon.
Bottom Line on FIT Stock
Avoid it. At $5, it has snap-back potential. At $6, it’s uninteresting. At $7, it’s sure to fall.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.