When it comes to picking the right investments, I like to think that I have a solid handle on picking winners from losers. However, fitness tracking specialist Fitbit (NYSE:FIT) is the name that keeps disappointing me. I have generally viewed Fitbit stock as an opportunity to bank on health and fitness trends. Unfortunately, I’ve been wrong a lot.
Because of this sad history, even exceptionally positive news for FIT stock doesn’t excite me. For instance, shares jumped up 8% to start this week. Exciting developments, such as Fitbit’s collaboration with healthcare giants Bristol-Myers Squibb (NYSE:BMY) and Pfizer (NYSE:PFE) to develop a comprehensive warning system for atrial fibrillation (AFib) recently bolstered Fitbit stock.
Moreover, we have the fact that Americans desperately need motivators for health and wellness. According to Publichealth.org, one of the main culprits for this nation’s obesity crisis is increased food consumption. For instance, in 2000, the average American ate 20% more calories than they did in 1983. Further, we have a meat obsession:
Today, each American puts away an average of 195lbs of meat every year, compared to just 138lbs in the 1950’s. Consumption of added fats also shot up by around two thirds over the same period, and grain consumption rose 45% since 1970.
Under this context, you’d expect FIT stock to fly. Unfortunately, shares of the fitness tracker have only printed red ink since the final quarter of 2015. Irrespective of Fitbit’s potential, the markets have not had any confidence toward management’s forecasts.
With the company scheduled to release its third-quarter earnings report on Oct. 30, how should investors approach Fitbit stock?
Fitbit Earnings to Focus on “Conversions”
In any financial disclosure, meeting targets are always important. The Q3 Fitbit earnings report is no exception. However, how the markets will react to Fitbit stock depends on how management intends to convert its potential into results.
First, let’s take a look at what we’re up against. Covering analysts anticipate earnings per share to come in at a loss of 10 cents. This target is right in the middle of the estimate spectrum, which ranges from a loss of 11 cents to a loss of 9 cents.
In the year-ago quarter, EPS was 4 cents, beating out the then-consensus calling for a loss of a penny. Unfortunately, even if FIT stock meets EPS estimates, the comparative optics wouldn’t look too hot. Again, this is why management needs to step up with their conversion strategy.
On the revenue front, analysts are eyeing sales of $345.3 million. This consensus target is slightly near the bullish end of the spectrum, which ranges from $338.5 million to $351.4 million. In the Fitbit earnings report of Q3 2018, the company reported nearly $394 million. Therefore, even with a strong revenue beat, the optics are not FIT’s friend.
And not to pile on the bad news for Fitbit stock, but the company’s active user count is peaking. Between 2017 and 2018, active users increased from 25.4 million to 27.6 million, or a mere 9%. It’s a far cry from earlier years, which mostly saw robust double-digit growth.
To be fair, Fitbit’s AFib detection initiative is exciting because of its comprehensive nature. This system isn’t just about detection but forwarding actionable ideas and solutions.
However, to bring real excitement back to FIT stock, management must provide a roadmap for converting this innovation into results. Otherwise, they’re just going in circles.
Fitbit Stock Remains an Interesting but Highly Risky Bet
It’s clear that success for Fitbit stock will involve more than just fitness trackers. Competitors like Apple (NASDAQ:AAPL) and Garmin (NASDAQ:GRMN) have entered the space and essentially commoditized it. Therefore, I’m encouraged that Fitbit’s big-picture innovations, such as the AFib initiative, are gaining momentum.
As I said earlier, management must step on the gas and prove that this can translate into meaningful growth.
That said, don’t overlook the fitness tracker segment. Multiple online resources list Fitbit trackers as the best devices for the money. The reason? I’m guessing that trackers are solely designed for health and wellness. Given that your smartphone is also a critical communication device, you don’t want to risk losing battery life unnecessarily.
On the other hand, Fitbit trackers are separate devices. If they break, they’re not that expensive to replace. Plus, losing your tracker won’t leave you stranded with limited options, so long as you have your smartphone.
Still, FIT stock is a risky proposition. If management hiccups during Q3, I could see shares unwinding rather quickly. It is interesting, though, so I’m willing to give it a go with silly money I can afford to lose.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.