I understand the attraction of Fitbit (NYSE:FIT) stock. Cash on the balance sheet accounts for almost half the market capitalization of Fitbit stock. And FIT stock, at least on a price-to-revenue basis, is cheap.
At the same time, however, I’ve been a longtime skeptic regarding FIT, and even as Fitbit stock has rallied sharply in 2019 – gaining 30% YTD – that opinion hasn’t changed. FIT stock is intriguing from a distance.
Looking closer, there are plenty of reasons for caution. Here are three of those reasons that suggest investors should consider taking profits, particularly ahead of Q4 earnings that should arrive later this month.
Reason #1: We’ve Been Here Before with FIT Stock
FIT stock now has gained 52% from late October’s all-time lows. It’s been a great rally for investors who were able to time it properly.
But it’s not a rally that suggests something has fundamentally changed with Fitbit stock. Over the past two-plus years, as FIT has remained dead money, rallies have come and gone. Starting in August 2017, FIT climbed from $5 to $7. The gains evaporated in less than six months.
It jumped again in May, from under $5 to over $7 in June. By late October, the stock as noted was at an all-time low.
Fitbit did post a solid earnings beat in late October, which catalyzed a rally before broad market fears wiped it out. But a ‘beat’ relative to expectations is not the same as real progress. And the fact remains that Fitbit’s story hasn’t changed materially, while the stock price has.
Reason #2: Fitbit Stock Isn’t ‘Cheap’
With cash on the books over $600 million, Fitbit has an enterprise value under $1 billion. Against 2018 revenue guidance of “approximately” $1.5 billion, that suggests an EV/sales multiple of about 0.6x.
That seems cheap. The valuation actually sits modestly below that of fellow hardware play GoPro (NASDAQ:GPRO), who continues to struggle. It’s a noted discount to rival Garmin (NASDAQ:GRMN), which trades at almost 4x revenue. Consumer electronics manufacturer Logitech (NASDAQ:LOGI) is at 2x. Move FIT’s multiple to even 1x sales, bulls argue, and the stock climbs above $8.
But there’s a catch here. Fitbit isn’t profitable. In fact, it isn’t really close. Adjusted EBITDA this year is likely to be in the range of negative $50 million (excluding another $100 million in share-based compensation) based on guidance. Free cash flow is guided to negative $20 million. And Fitbit revenue still is guided to decline this year while in the supposedly strong Q3, revenue rose just 0.3%.
A declining, unprofitable business simply can’t be called cheap. A turnaround? Sure. But as I detailed last month, Fitbit probably has to grow revenue in the order of 50% simply to become profitable when accounting for the dilution of Fitbit shareholders. The math here, in terms of profitability, still doesn’t work. Fitbit is going to need a blowout Q4 and a huge 2019 to even get close to changing that.
Reason #3: Competition Isn’t Going Anywhere
And it’s tough to grow revenue without market leadership. Fitbit no longer is the market leader; that crown belongs to Apple (NASDAQ:AAPL). And Apple Watch sales, unlike those of Fitbit, are growing, per both SEC filings and management commentary. Garmin is having success as well.
Again, there’s a case for a turnaround from Fitbit. But even better products suggest a tough road to hoe when it comes to gaining market share. Low-end wearables are going to be commoditized; challenging Apple on the high end of any product is always difficult.
The numbers say Fitbit has to grow. The competitive environment suggests that will be difficult. That’s a tough combination. But with expectations clearly rising heading into earnings, investors seem to believe that’s the path Fitbit is on.
Perhaps. Perhaps this time is different. But history and even recent results suggest otherwise. Fitbit does have a fortress balance sheet, and plenty of time to execute its turnaround.
That’s been the case for two years, however, and FIT stock has provided minimal returns for investors who held over that period. With the stock up 30% already this year, investors looking for more very well could be disappointed.
As of this writing, Vince Martin has no positions in any securities mentioned.
