The bulls that were plowing into Fitbit Inc (NYSE:FIT) headed into Thursday’s post-close earnings report are likely regretting that decision now. After gaining 5% during regular trading hours, Fitbit stock is now tanking the tune of 13% in pre-market action when disappointing results were underscored by even more disappointing guidance.
The end of the world for Fitbit? No. If nothing else, Fitbit is a powerful brand name that will always be able to leveraged somehow.
But, with hopes that its relatively new Ionic smartwatch would mark the end of waning revenue and lingering losses, last quarter’s shortcomings largely confirm many shareholders’ worst fears.
FIT Stock Earnings Recap
For the quarter ending in December, Fitbit turned $570.8 million worth of revenue into an operating loss of two cents per share. The bad news is, those numbers were less than the figures analysts were expecting. The pros were modeling a breakeven on $588.1 million in sales.
The even-worse news is, sales were down (again) on a year-over-year basis, versus a top line of $573.8 million for the comparable quarter of 2016.
All told, Fitbit sold 5.4 million wearable devices, down from 6.5 million devices for the fourth quarter of 2016.
Average selling prices were up year-over-year, however, to $102 thanks to the recent introduction of the $300 Ionic. The company’s first true entry into the smartwatch race fairly well dominated by high-end choices from Apple Inc. (NASDAQ:AAPL), and then low-end choices from Xiaomi and Huawei.
Fitbit has defined itself as the top mid-priced provider, but has yet to prove the mid-price market is worth addressing.
Co-founder and CEO James Park commented on the fourth-quarter numbers:
“We made important progress in 2017 under rapidly changing market conditions. We delivered on our full-year guidance and drove down operating expenses while continuing to invest in innovation. We delivered important foundational assets with the launch of the Fitbit operating system and SDK, allowing us to scale future smartwatches quickly and deliver dynamic experiences for users. We also made progress in integrating into the healthcare system, with strategic collaborations with United Healthcare and Dexcom, and acceptance into the FDA’s digital health pre-certification program.”
Reality Check
The sharp post-close decline in the price of Fitbit stock following Monday’s gain during regular trading hours speaks volumes about last quarter’s results, but perhaps says even more about investors’ opinion of Fitbit’s future.
Guidance-wise, the company is calling for sales of between $240 million and $255 million, down between 15% and 20% from Q1 2017’s top line. That’s expected to translate into a loss of between 18 cents and 21 cents. For the full year, Fitbit is calling for sales of around $1.5 billion, versus 2017’s total of $1.61 billion.
The outlook is understandably discouraging, particularly in light of the smartwatch outlook.
Tech research firm CCS Insight’s recent outlook for the smartwatch market suggests sales should reach 71 million devices this year and ramp up to 140 million units in the year 2022. It doesn’t appear Fitbit — and the ballyhooed Ionic in particular — is expected to catch much (if any) of that wave.
The company does have something of an ace up its sleeve. That is, a pivot toward a more clinical use of its fitness trackers. Park mentioned partnerships with DexCom, Inc. (NASDAQ:DXCM) and UnitedHealth Group Inc (NYSE:UNH), but could have also mentioned the recent acquisition of Twine Health — the developer of a platform built from the ground up to create and deliver data to caregivers (and insurers) in a HIPAA-compliant way.
Still, that’s a market Apple’s smartwatches are penetrating as well, and it would take little for Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) to turn up the heat on its Android Wear platform with a little help from its healthcare-technology arm.
Bottom Line for Fitbit Stock
In retrospect, last quarter’s tepid results shouldn’t come as a complete surprise. Consumer technology analysis organization Canalys reported earlier this month that Apple’s smartwatch outsold all others during the holiday quarter, beating a record previously held by Fitbit despite the debut of the Ionic just a few weeks prior.
It’s a strong sign that the smartwatch from Fitbit just didn’t excite consumers, who were willing to pay up for a premium brand or who were content with the $15 Mi Band fitness tracker from Xiaomi.
Further turning would-be buyers off were whispers that the Ionic was difficult to connect with a user’s wireless service.
Park aims to wade deeper into smartwatch waters, adding to his comments, “In 2018 we’ll focus on managing down expenses, continuing to expand in the smartwatch category and supporting our engaged global community on their health and fitness journeys.”
But in many regards, the Ionic was the company’s last chance to prove to the market a mid-priced option was marketable and functional. From here, any meaningful growth will almost have to be driven by healthcare-oriented and partner-pushed devices.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
