Typically, when the shares of a publicly-traded company rise 23% over the last year, no one questions the company’s viability. However, Fitbit (NYSE:FIT) stock, which has jumped 23% over the last 12 months, isn’t quite typical.
While the enthusiasm toward Fitbit stock encourages speculators, the company’s fourth-quarter earnings report, which was unveiled at the end of February, left many observers disappointed.
On paper, management delivered the goods in Q4.
Consensus estimates pegged earnings per share at 8 cents. The wearable-device maker trounced that target, generating earnings of 14 cents per share of Fitbit stock.
The Q4 results also marked a conspicuous departure from the disaster of 2017’s Q4, which featured an EPS loss of 2 cents. At that time, analysts on average had expected FIT to break even.
Unfortunately, the revenue picture spoiled the company’s Q4 results which it reported six weeks ago. In Q4, the company rang up a little over $571 million of revenue, representing a miniscule year-over-year gain.
If the embattled organization only had to address one quarterly miscue, FIT stock wouldn’t be as risky. However, the ugly print is only part of FIT’s problems.
First, the fitness-tracker industry is heavily commoditized. While Fitbit stock initially rose on the novelty of the company’s products, it’s no longer the only show in town. And, thanks to the price declines of technology, competitors don’t have to spend much to deliver a competent product.
Second, those competitors read like a who’s who of consumer-electronics titans. Apple (NASDAQ:AAPL), Garmin (NASDAQ:GRMN) and even Amazon (NASDAQ:AMZN) either directly compete with Fitbit or are encroaching on its territory.
If that wasn’t bad enough, fitness trackers represent a small portion of these giants’ revenue stream. But for FIT stock, fitness is everything.
The Dangerous but Intriguing Case for Fitbit Stock
Looking at all the evidence, the safest approach to FIT stock is to not deal with it at all. Like a lot of folks, I have a soft spot for the underdog. But sometimes, the bullies are too big and too strong.
Plus, earlier this year, InvestorPlace columnist Vince Martin labeled Fitbit stock “dead money.” He’s right. Since early 2017, Fitbit stock price has gone absolutely nowhere.
At the same time, it’s not entirely inconceivable for the Fitbit stock price to move significantly higher. Although the company’s core retail segment is extremely saturated. saturation can be defeated through differentiation.
When approaching FIT, an overriding temptation exists to only focus on the company’s products themselves. While its products obviously matter, they’re only half of the equation. The other half involves the company’s unparalleled network size and engagement.
In early 2018, Fitbit boasted 25.4 million active users. Out of this number, 20 million users utilized the company’s app, which features a host of practical advice along with a supportive community.
Today, that active-user count has exceeded 27 million, while FIT’s overall unit sales have declined. I’m obviously not a fan of the company’s negative revenue trend, but the company’s high engagement is positive. With strong active user growth in a saturated market, FIT clearly resonates with audiences.
Perhaps engagement alone won’t be enough to save the company’s fitness trackers. However, management can use this engagement to help it sell medical devices and other health-related ventures. Moving into that arena requires trust. As Fitbit’s active-user tally shows, it’s a proven brand that appeals to many consumers.
Therefore, the company enjoys credibility while everyone else is merely throwing product. Over the long run, this could translate to outsized gains for Fitbit stock.
Execution Also Matters
Of course, we can talk all day about what management can do. But until it unveils a feasible plan, I’m afraid the Fitbit stock price will remain range-bound.
In other words, execution matters, not just a great narrative. But I think one of the mistakes people make is assuming that FIT stock lacks viable, potential, positive catalysts.
Based on the magnitude of FIT’s engagement, I don’t think that’s true at all. However, the company has to put everything together. Whether or not it can do so is a question mark, which makes Fitbit stock a high-risk, high-reward proposition.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.