The owners of Fitbit (NASDAQ:FIT) stock should try to answer a few questions when analyzing the company’s first-quarter results. FIT is scheduled to report earnings after market close tomorrow, May 1. The results in general will of course be important. However, the answers to the questions below will really determine the performance of Fitbit stock going forward.
Is Fitbit’s Previous Full-Year Guidance Too Conservative?
Since FIT reported its fourth-quarter results in February, Fitbit stock has tumbled by about 20%. The big catalyst for the decline was FIT’s weaker-than-expected 2019 guidance. In my column analyzing the results, I argued that “the company’s recent history indicates that its guidance tends to be overly conservative.” Specifically, I noted that “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.”
If FIT’s earnings again meaningfully beat analysts’ consensus outlook this week, the full-year guidance that the company issued in February was almost certainly conservative. And if its 2019 guidance is conservative, then the recent slump of Fitbit stock was unwarranted.
Is Fitbit’s Revenue From Employers and Health Insurers Rapidly Rising?
In February, FIT predicted that in 2019, the growth of its revenue from insurers and employers would accelerate above 2018’s 8% increase and reach $100 million. If that revenue stream is growing at an annual rate of 10% or higher, and those sales become more material to FIT’s overall results, then investors should become much more bullish on FIT stock.
There are a few reasons why revenue from insurers and employers is so important for Fitbit stock: That revenue is recurring, which tends to impress Wall Street much more than non-recurring revenue from sales of devices, the revenue stream carries meaningfully higher profit margins than revenue from devices, and acceleration of the revenue will validate FIT’s strategy of lowering its prices to obtain more data, thereby raising its appeal to employers and insurers.
Is Non-Device Consumer Revenue Rapidly Rising?
In many ways, this question is similar to the previous one. Non-device revenue, which includes subscriptions to Fitbit’s video training system, Fitbit Coach, and other subscription services, tends to be recurring and carry higher margins than device sales.
Moreover, large increases in the company’s non-device revenue will definitely validate its strategy of selling cheaper devices in order to grow a large user base that FIT can effectively monetize.
Is FIT Successfully Innovating on the Healthcare Front?
One of the main attractions of Fitbit stock was always the eventual ability of its devices to track glucose levels, sleep apnea and blood oxygen levels. By providing these services, FIT’s devices, I thought back in 2017, would offer consumers a way to quickly and easily track their health.
Perhaps partly because the FDA is involved with these issues, the process has gone more slowly than I’d hoped. I found no evidence that the glucose tracker, which is supposed to have been unveiled in partnership with DexCom (NASDAQ:DXCM) has emerged. As of late 2018, FIT said that the tracker wasn’t ready yet, and I have not heard anything further about it yet.
As of December, the sleep apnea detector , which utilizes the blood oxygen tracker, was reportedly still in beta testing. I was not able to find any recent information about the blood oxygen tracker.
On a positive note, FIT has successfully launched a women’s health tracker on its smartwatches that can keep track of many aspects of menstrual cycles and even help couples conceive.
If Fitbit makes further progress with enabling users to track important aspects of their health, sales of FIT devices should surge tremendously, boosting FIT stock in the process.
The Bottom Line on Fitbit Stock
The evidence indicates that Fitbit’s 2019 guidance was conservative. As investors realize that, FIT stock should rise over the course of the year. Over the longer term, as FIT sells more devices to companies and enables its devices to track more aspects of people’s health, FIT stock should rise meaningfully. Furthermore,, FIT should get a boost from the launch of 5G.
Still, the owners of FIT stock, myself included, would obviously like to see these positive catalysts occur sooner rather than later, so FIT doesn’t lose its first-mover advantage in these areas.
As of this writing, the author owned FIT stock.