Should You Buy Fitbit Stock on the Dip?

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Fitness tracking company Fitbit Inc. (NYSE:FIT) was having a pretty great year in 2019. Fitbit stock gained 33% in just two months as optimism regarding its devices grew. However, all of that momentum came crashing down this week after the firm reported its fourth-quarter results on Wednesday after the bell.

Fitbit stock was down 16% in pre-market trading on Thursday morning as investors digested the firm’s worse-than-expected Q1 guidance. However, it’s worth asking whether things are as bad as Mr. Market would have had you believe yesterday or if this dip could be a buying opportunity.

The Turnaround Rally of Fitbit Stock

Why Fitbit (FIT) Stock Could Be Worth Buying on Weakness

Source: Fitbit

Investors with impeccable timing could be sitting on 40% gains if they had bought Fitbit stock back in October when the share price was below $5, and they ditched their shares before the company’s guidance disappointed investors.

 

That rally was built on positive sentiment regarding the company’s turnaround efforts, so the question now is whether FIT’s quarterly results were bad enough to suggest that its comeback isn’t materializing.

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. 

In 2018, Fitbit’s health-solutions business grew 8% and management believes that it will grow strongly again this year. Revenue from that segment is expected to rise to around $100 million in 2019. The firm recently debuted two new devices made specifically to accommodate health insurers, a move that suggested Fitbit is betting big on growth in that space. 

Aside from seeking to step up its efforts to sell its devices to businesses, 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. 

Mixed Results 

In addition to promising metrics regarding the health solutions business, there was a lot for the owners of Fitbit stock to like about Fitbit’s Q4 results. The number of devices sold increased for the first time since 2016 and the number of its active users jumped 9% year-over-year. Fitbit is working to monetize those users with a paid software offering due to launch this year, so the growth of its active-user base was another important step towards a successful turnaround. 

What caused Fitbit stock to drop was the company’s Q1 guidance, which called for a loss of 22 cents per share of FIT stock on revenue of between $250 million and $268 million. That’s significantly lower than analysts had been expecting and caused investors to run for the hills. 

How Bad Is It?

The disappointing Q1 guidance takes into account the fact that March tends to be the slowest month for FIT. For the full year, the firm guided for revenue of between $1.52 and $1.58 billion, which puts analysts’ consensus outlook at the higher end of management’s range. 

So, the current quarter doesn’t look promising for Fitbit stock, but if you believe in the company’s turnaround potential. the disappointing guidance shouldn’t spook you. So far, Fitbit’s transition appears to be on track. 

What you need to ask yourself is whether or not there’s going to be room for Fitbit in the smartwatch space, a question that the firm’s quarterly results haven’t answered. InvestorPlace’s Josh Enomoto made a compelling case for Fitbit stock on the basis that its watches’ price points line up with its target market. Vince Marten took the opposite stance on this website, citing tough competition and a history of disappointing shareholders. 

The Bottom Line on Fitbit Stock

Fitbit has made an impressive strategy shift away from simply selling fitness trackers to consumers. The firm’s expansion into supplying devices to insurers and employers is compelling, but those relationships have the potential to deteriorate if FTI’s competitors start to adopt a similar strategy.

In any case, I think the post-earnings tumble of FIT stock was overdone and may have created a great buying opportunity. It’s risky, but FIT stock has the potential to deliver impressive gains if FIT can successfully execute on its new strategy.

In any case, FIT has been beaten down enough that the share price is likely to bounce if the firm deliver any good news during its Q1 report in a few months. 

As of this writing, Laura Hoy was long FIT.

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/should-you-buy-fitbit-stock-on-the-dip/.

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