Fitbit Stock Earnings Refute Bear Thesis on FIT

The outlook of Fitbit stock is generally positive, but FIT has also become more risky

Fitbit’s (NASDAQ:FIT) fourth-quarter results refuted the bearish thesis on Fitbit stock, while evidence shows that the company is making solid, important progress on multiple fronts.

Fitbit Stock Earnings Refute Bear Thesis on FIT
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While Fitbit’s weaker-than-expected guidance caused Fitbit stock to retreat in the wake of the results, the company’s recent history indicates that its guidance tends to be overly conservative.

So the owners of FIT stock who plan to hold onto the shares beyond the short-term shouldn’t worry too much about that issue. Still, FIT needs to accelerate both the pace of its innovations and the growth of its revenue from companies soon. This is the only way for Fitbit to keep gaining market share and to move Fitbit stock meaningfully higher.

The Results Refuted the Bear Thesis on Fitbit Stock

Those who are bearish on Fitbit stock have generally maintained that the company’s products don’t hold a candle to Apple’s (NASDAQ:AAPL) Apple Watch. Consequently, they have predicted that FIT will hemorrhage money, eventually causing Fitbit stock to drop like a rock. And the valuation of FIT stock, which, after backing out the company’s cash, values it at well under $1 billion, suggesting that much of the Street continues to believe that bearish thesis.

Yet in Q4, FIT sold 5.6 million devices, representing a year-over-year increase of 3%, driven by strong demand for the company’s popular, new smartwatch, the Versa. Moreover, the company’s operating income came in at $36 million, while its earnings per share was 14 cents, well above analysts’ consensus outlook of 7 cents.

Perhaps more importantly, separately from FIT’s results, research firm Strategy Analytics, also on Wednesday, released a report that showed that FIT’s smartwatch market share had almost tripled to 12.7% last quarter from just 4.3% during Q4 of 2017. Moreover, FIT sold 2.4 million smartwatches last quarter, versus just 0.5 million a year earlier, the firm reported.

Meanwhile, Apple’s share of the smartwatch market actually dropped about ten percentage points year-over-year to 50%. Clearly, taken together, this information totally contradicts the thesis that Fitbit will be destroyed in the face of Apple’s dominance of the smartphone market, while Fitbit can never be profitable.

The Guidance Was Probably Conservative

Fitbit stock dropped sharply in the wake of the company”s Q4 results because its Q4 and 2019 guidance came in well below expectations. But in both Q3 and Q4, Fitbit’s actual results came in well above its guidance, suggesting that its management has decided, as a general policy, to be very conservative about its guidance.

For Q3, its revenue came in at $393 million, versus the company’s guidance range of $370 million to $390 million, and its EPS was 4 cents, versus the guidance range of a loss per share of 2 cents to EPS of 1c. For Q4, its guidance on revenue was “greater than $560 million,” and its revenue was $571 million i.e. meaningfully above $560 million.

Its EPS guidance was “greater than 7 cents,” and its actual EPS was double that, i.e. 14 cents. So investors shouldn’t read too much into the fact that the company’s Q1 and full-year 2019 guidance came in below expectations.

Fitbit Needs to Accelerate Its Sales to Businesses and Its Innovations

As InvestorPlace columnist Laura Hoy pointed out in a column published this week:

“Fitbit has been reworking its business to build out its wellness platform and create smartwatches rather than just fitness trackers. A big part of that shift has been Fitbit’s “health-solutions” arm. That includes, among other things, FIT’s efforts to sell its devices to employers and insurers to facilitate their efforts to improve the health of their employees and clients….FIT has also been working to reposition itself as a wellness platform. The firm has been able to leverage the data it collects from users to create the Fitbit Care program, which helps people set and achieve their wellness goals by using coaching software.”

I have no doubt that that is the correct, long-term strategy for FIT and Fitbit stock. Given Fitbit’s combination of affordability compared with Apple, an operating system that can interface with everyone’s cell phone, better battery life than Apple, and American marketing and leadership teams, FIT is much better positioned than either AAPL or its Chinese competitors to benefit from collecting data, selling software, and selling its products to American businesses.

Moreover, if FIT is ever stuck with a “commodity” product that doesn’t offer differentiating features and services, it will probably get killed at the high end by Apple and at the low end by the Chinese smartwatch makers.

More specifically, if FIT doesn’t stay ahead of its competitors when it comes to measuring people’s health and isn’t able to effectively sell its products to businesses and services to individuals, the Street will waste no time in losing confidence in Fitbit stock. That’s especially true because FIT said it would double down on its new strategy by lowering its average selling prices, ostensibly in order to attract more corporate customers and consumers who can buy its service offerings and software.

FIT noted that its health-solutions business grew 8% last year, and that it expects this growth to accelerate in 2019. That’s certainly a good sign for Fitbit stock, and I do have confidence in the FIT team, given all it’s achieved so far. Still, there’s no denying that Fitbit has upped the ante and made FIT stock riskier with its new strategy.

As of this writing, Larry Ramer owned shares of Fitbit stock.

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