Shares of Fitbit (NYSE: FIT) fell 7.6% the day after the company reported first-quarter results. Fitbit stock is now down by over 15% on the month. Revenue grew a healthy 10%, while EBITDA improved, albeit at a loss. The company’s downbeat guidance disappointed shareholders. If lower prices led to higher volume sales, why is management so negative on its outlook?
Let’s take a look at the Q1 results for Fitbit stock. The company reported revenue growing 10% Y/Y to $272 million. The non-GAAP loss came in at –($0.15) a share.
Unit volume sales improved an impressive 36% Y/Y, driven by a lower ASP of $91. ASP fell 19% Y/Y. Though it is not comparable due to last year’s benefit of a favorable one-time item, non-GAAP margin fell 1290 basis points Y/Y to 34.2%.
Fitbit cut costs by 13% to $151 million. It ended the quarter with $644 million in cash. The stock now trades at 3x cash, based on ~$2 a share in cash and a stock price of $4.96. With no debt on the books and plenty of cash, Fitbit can afford to grow market share through lower ASP.
Weak Outlook for Fitbit Stock
Fitbit forecast higher unit sales but ASP falling. For 2019, overall revenue will grow just 1%-4%, or $1.52 billion – $1.58 billion. The market expected revenue of $1.56 billion.
For the current second quarter, the EPS loss will be greater than expected, at -$0.20 -$0.17, compared to the consensus of -$0.16. Similar to its full-year outlook, higher unit sales and lower ASP will result in revenue growing 2%-7% in Q2. That is, $305 million – $320 million.
Second-quarter gross margin (non-GAAP) will trend higher due to higher smartwatch sales. Disciplined spending in CapEx, at 5% of revenue, will also help.
Fitbit’s rate of revenue growth in the single digits will hardly attract momentum investors. The quarterly losses will also scare away value investors. Yet Fitbit stock could give a trading opportunity for speculators. If smartwatch revenue grew 42%, compared to 30% on a year-over-year basis, ASP could rise in the longer term. Sure, 2019 will not be the year that revenue grows in the double digits but that could change in 2020.
Revenue from Fitbit’s FHS, or Fitbit Health Solutions, grew 70% due to strength from the overseas market. The unit’s contribution to overall results is minimal, for now.
The $100 million expected revenue in 2019 is just 6% of the yearly revenue. Already, three major health plans use the Fitbit Care platform and devices for diabetes management. Plus, a combination of higher unit sales and sign-ups for FHS could change that in the next few years.
Fitbit and the Future
Fitbit continued to add new users to its Fitbit platform. And as the introduction of more accessible, affordable devices fuels these user additions, Fitbit will find ways to monetize its platform. Its first step involves selling more Fitbit Charge 3, Fitbit Inspire, Fitbit Inspire HR and Fitbit Versa Lite Edition.
Collectively, sales of these devices represented 67% of revenue in the first quarter.
Fitbit’s unit sales growth is a notable accomplishment in light of higher cost controls. R&D spending fell 15% to $63.5 million. Sales and Marketing costs fell 5% to $64.8 million as the company relied on fewer promotions and transaction costs. G&A fell 27% to $22.5 million as litigation spend fell and facility costs decreased.
The Bottom Line on Fitbit Stock
Wall Street analysts, despite issuing mixed ratings on the stock following the earnings report, still have an average price target of $6.60 on FIT stock. The upside of 33% is possible if Fitbit succeeds in its transformation. By growing its addressable market through global expansion, lower unit prices will bring in more users.
Fitbit will transition from relying on hardware sales to generating recurring revenue from its healthcare platform.
Bearishness on FIT stock picked up steam months ahead of the earnings report. When management issued a weak near-term outlook, the stock plunged.
Speculators could start a position in the stock to play the rebound. Investors who believe the turnaround is real and is patient enough to wait for 2-3 years could get rewarded.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.