Fitbit’s (NASDAQ:FIT) upcoming fourth-quarter results are likely to show that its recent, positive trends are accelerating. As a result, Fitbit stock will probably rise meaningfully in the wake of the report.
Of course, Q4 earnings per share will be a crucial metric for Fitbit and Fitbit stock, especially because the holiday shopping season, which is very important for the company’s overall results, occurred last quarter.
In Q3, the company’s bottom line was positive for the first time in many quarters. Assuming that the company’s Versa smartwatch and its Charge 3 fitness tracker continued to be popular with consumers in Q4, Fitbit’s EPS should increase meaningfully above the 4 cents that it reported in Q3.
Research firm Roth Capital believes that the company’s products were indeed popular with holiday shoppers. On Jan. 3, the research firm told its clients that FIT “likely had strong holiday sales that will lead to a ‘solid’ Q4 report,” Seeking Alpha reported. Among the evidence cited by Roth for its hypothesis were “internal checks, top seller lists, app downloads, and limited discounting.” The firm reiterated its $8 price target and its “buy” rating on the stock.
In the past, Roth has been upbeat about Fitbit’s ability to generate “tens of millions of dollars in recurring sales” from companies and health insurers that want to use Fitbit’s products to improve the health of their employees and beneficiaries, respectively.
Long-Term, Positive Trends Likely to Lift FIT Stock
The revenue generated by Fitbit Health Solutions, the company’s business that focuses on selling devices and services to enterprises, jumped 26% year over year in Q3. However, FIT noted that the unit accounted for less than 10% of its Q3 revenue. As more health insurers, hospitals and companies use FIT’s devices to help combat obesity and detect health problems such as atrial fibrillation and sleep apnea, the unit’s revenue growth should accelerate meaningfully and account for a much greater percentage of FIT’s overall revenue.
And as Fitbit Health Solutions’ trends improve, investors will become more confident in the company’s ability to grow its recurring revenue and improve its overall results going forward. As a result, the acceleration of Fitbit Health Solutions will prove to be a powerful, positive catalyst for FIT stock.
If the growth of the unit’s revenue accelerated meaningfully and it generated more than 10% of the company’s revenue last quarter, more investors will look to buy FIT stock in the wake of the results, boosting Fitbit stock.
Gartner, Google, And Fitbit
In another positive note for Fitbit, research firm Gartner in November predicted that consumer spending on smartwatches would reach $16.2 billion. According to Counterpoint Research, Fitbit had a 16% share of the smartwatch market in the third quarter of 2018. up from just 6% during the same period a year earlier.
If FIT’s market share rises to 20% this year, and we assume that Gartner’s forecast is correct, then Fitbit’s revenue will jump to $3.2 billion in 2019, That would mean the current price-to-sales ratio of FIT stock is about 0.5. Backing out Fitbit’s cash would lower the ratio to less than 0.33. That’s quite minuscule for a company that’s gaining share in a growing sector and appears to be on the verge of profitability.
After Google (NASDAQ:GOOG, NASDAQ:GOOGL) agreed to buy smartwatch technology from Fossil (NASDAQ:FOSL) in mid-January, speculation arose that Google was looking to improve its own smartwatch operating system and launch its own Pixel watch.
However, given Google’s partnership with Fitbit, the search-engine giant may have made the deal with Fossil to enhance products the two companies are developing together. As a result, Google’s deal with Fossil could actually be bullish for Fitbit stock.
The Bottom Line on Fitbit Stock
Fitbit looks poised to report meaningful Q4 profits — and its relatively strong bottom line should boost Fitbit stock in the wake of the results. Also likely to boost FIT stock are the growth of Fitbit’s sales to enterprises and the evolution of its partnership with Google, along with the expansion of the smartwatch market.
As of this writing, Larry Ramer owned shares of FIT stock.