Fitbit (NYSE:FIT) traded mostly unchanged on the day before its second-quarter report, as traders couldn’t decide which direction FIT stock was going to run.
Shares rocketed from sub-$5 levels in May to almost $8 per share by mid-June. However, that rally fizzled out as shares bled back down to the $5.50 level. Luckily it found support from its 100-day and 200-day moving averages and has been tip-toeing higher since.
Once the company’s earnings were out, we got a big rally up to $6.50 (as you’ll see in a minute on the chart below). So what did Fitbit report?
Fitbit Earnings
For the quarter, Fitbit reported a loss of 22 cents per share, slightly ahead of the 24 cents per share loss analysts were expecting. Revenue of $299.3 million declined 15% year-over-year but came in ahead of expectations by almost $14 million.
After a little shake-and-bake, shares are up about 3% ahead of the conference call where investors will look for a promising story from management on how the company is turning around the ship. Keep in mind, analysts expect an 8.7% decline in sales this year, but a bump in revenue next year.
That indicates that 2018 is forecast to be Fitbit’s “bottoming year.” A sign that that’s not the case will leave investors with less confidence and less likely to hold on for the long term. Working in Fitbit’s favor though? The second half of 2018. With a strong economy at its back, the holiday season should be strong for consumer products.
As for next quarter, Fitbit expects to generate revenue of $370 million to $390 million and garner earnings ranging from a 2 cent per share loss to a penny per share gain. At the midpoint, that’s $380 million in sales and about break-even on earnings. That’s ahead of analysts’ estimates calling for $377.5 million in sales and a 2 cent per share loss.
During the quarter, sales regions were a mixed bag. On the downside, Fitbit’s largest market — the U.S. — saw sales fall 8.4% to $182.5 million, while its second-largest market — EMEA — saw sales fall almost 40%. Ouch. But the silver lining here was Asia-Pacific, which saw a 66.4% increase in sales to $35.1 million.
Fitbit will need Asia-Pacific to either become a bigger outlet for them, or it will need its other key markets to find some footing.
Moving on, Fitbit sold out of its smartwatch product, the Versa. Demand for the product is clear and that should help going into the second half of the year. Further, it helped give a boost to Fitbit’s average selling prices for wearables, which jumped 6% year-over-year to $106.
Evaluating FIT Stock
Not long ago, we took a closer look at 5 cheap stocks to buy and Fitbit was one of them. The wearables market continues to grow, mostly highlighted by the Apple (NASDAQ:AAPL) Watch. However, others have had staying power too. Mainly though, that player has been Fitbit.
The company, although far from its stock market glory days, continues to put out a product that consumers like. As adoption continues to increase for fitness trackers and wearables, Fitbit is in a unique position to benefit. Particularly if and when companies begin using them for health insurance.
In any regard, before the report Fitbit had a market cap of just $1.4 billion. Cash and short-term holdings totaled a whopping $658 million while Fitbit currently has no debt. In the last quarter, its cash holdings did slip a bit. But to hold that much cash with no debt and such a small market cap is attractive, even as Fitbit hasn’t got its business humming smoothly yet.
Trading FIT Stock
With that in mind, it was hard to be too bearish on Fitbit ahead of the numbers. With a top and bottom line beat and better-than-expected guidance, it’s hard to be too bearish after as well. We have so much happening on the chart.
Before the report, FIT stock pulled back perfectly into trendline and moving-average support. Now though, it rallied into its 50-day moving average and downtrend resistance.
So what now? Keep it simple: If you want to buy to FIT stock, wait for a pullback to $5.60 (depending on the conference call) or buy on a close over resistance. If it can so, investors will be looking for a return to its highs, good for a ~25% rally from current levels.
Investors could short on a break of support and look for a drop into the $4’s, but I’m not a big short-seller on sub-$5 stocks with no debt and plenty of cash. Sorry bears.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long AAPL.
