Fitbit (NYSE:FIT) reported Q1 earnings with some good news for investors. The company beat analyst expectations on revenue, sold 36% more devices than last year and saw its trackers post year-over-year unit growth for the first time in three years. Its Health Solutions business saw 70% growth. On a less positive note, ASP dropped and the company still lost 31 cents per share.
Investors’ reaction was mostly positive and Fitbit stock continued its 2019 roller coaster ride, closing up 1.7% and gaining an additional 2.4% in pre-market trading. However, it has since fallen back to earth, down 4.6% at the time of this writing.
On May 1, Fitbit released its Q1 earnings report. For FIT investors there was more good news in there than they have become accustomed to hearing.
Revenue was up 10% year-over-year, and it was the result in sales growth across all the company’s product lines. Even fitness trackers — Fitbit says unit sales of its smartwatches grew 117% year-over-year. That’s more than holding their own against the market leader Apple (NASDAQ:AAPL) Watch. In addition, sales for fitness trackers saw 17% growth on the year. That’s worth spiking out because it marks the first time in three years that Fitbit has seen growth in this segment.
In addition, the company’s Health Solutions division, which InvestorPlace contributor Larry Ramer noted as a key factor in the potential for a Fitbit stock rally, saw year-over-year revenue growth of 70%.
Overall, Fitbit sold 2.9 million devices in Q1 (up 36% year-over-year), which handily beat analyst expectations of 2 million. In addition, the $271.9 million in revenue for the quarter also exceeded the $259.7 million that analysts were projecting.
The degree of growth in sales numbers and the surprise signs of life in the fitness trackers category naturally boosted Fitbit stock, which closed up 1.7% and has been trading up an additional 2.42% in the pre-market.
But There Are Some Concerns
While FIT’s Q1 numbers had some real positives for the struggling company, they also revealed some potential causes for concern. Specifically average sales price (ASP). That number fell rather dramatically. And earnings, which remained in the red, with an average loss per share of 31 cents (although that was an improvement over the 34 cents loss per share in Q1 2018).
When you look at the growth in devices and compare it to the growth in revenue, the numbers don’t quite add up. You would expect the revenue numbers to be even higher. The reason they aren’t is that Fitbit has begun to compete aggressively on price. The company introduced a new Inspire line of inexpensive fitness trackers earlier this year with prices starting at just $69.95 along with a stripped down version of its Versa smartwatch (the Versa Lite Edition) which has a $159.95 price tag.
Where analysts were looking for an ASP in the $109 range, Fitbit reported an ASP of $91 per device.
The strategy of targeting value-conscious consumers has the potential to pay off. If Fitbit can keep growing unit sales this way, it can expand its platform and the growth in its user base would make the company’s Health Solutions division more attractive to big clients like insurance companies.
The downside is margins drop and the company has to sell a lot more devices to be profitable. The margin pressure was evident in the Q1 earnings report, which saw gross margins shrink from 46% a year ago to 32.9% in Q1 2019.
Fitbit remains in a tough position. It’s fighting for smartwatch market share against Apple and Samsung, and trying to re-ignite consumer interest in fitness trackers –a market where Xiaomi has become dominant by selling Mi bands starting at just $30. If the company’s new strategy of cutting prices pays off with sustained sales growth and further inroads into the corporate health market, that will be good news for Fitbit stock. If not, FIT investors can expect the roller coaster ride to continue.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.