Whenever high-flying stocks get their wings clipped, they are never the same on the markets. Fitbit Inc (NYSE:FIT) ended its recovery of the summer of 2016 when it warned on Nov. 2, 2016, that fourth-quarter estimates would miss estimates. Bears are all over the stock: short float stands at 43.5%. And when the company reports results in February, bulls still hope the company’s wearables devices sold like hot cakes.
Expectations Lowered for FIT Stock
In its third-quarter report, the company cut the current quarter’s estimates sharply:
“The company expects revenue between $725 million and $750 million, representing growth of 2%-5%, with non-GAAP earnings per diluted share in the range of $0.14 to $0.18, and a non-GAAP tax rate of approximately 33%.”
At a full-year earnings per share of between 55 cents and 59 cents, FIT trades at a forward P/E of up to 13.5 times (Based on Thursday’s closing price of $7.41). Investors clearly have low expectations for the company. Trailing quarterly sales grew by 23.1%. Shorts are winning the bearish bet because they understand a company with good products is not necessarily a good stock.
Competition Heating Up
Despite a record low valuation, low expectations for the quarter and potential growth in Europe and Asia, FIT stock has one big problem: competition. During the holiday season, consumers had the choice of buying many cheaper alternatives at a fraction of a FIT device. In Asia, Xiaomi sells similar wearables for a fraction of FIT’s price.
On the high end, FIT competes with the Garmin Ltd. (NASDAQ:GRMN) Vivosmart HR, which costs the same as Fitbit’s Charge 2 (both cost around $149.95) and Apple Inc.’s (NASDAQ:AAPL) Apple Watch 1 and 2.
If FIT’s stock collapses post-earnings, it will be among a long list of fallen fad stocks. This includes GoPro Inc (NASDAQ:GPRO), whose action camera is losing popularity and Etsy Inc (NASDAQ:ETSY), whose handmade products compete with Amazon.com, Inc.’s (NASDAQ:AMZN) homemade store.
Fitbit’s next phase of growth depends on expanding internationally. Executing on this requires good management. When management said it mishandled the Flex 2 supply chain, few investors should have any confidence on management.
On Jan. 12, news broke out that Fitbit may have wanted to acquire Jawbone late last year. This is another example that suggests investors should worry about FIT’s management capability.
The company needs to preserve its cash, instead of spending it on supply chain management
Bottom Line on Fitbit
Fitbit knows that competition will worsen over time. Its (rumored) attempts to buy Jawbone would have eliminated that threat, positioning the company as a stronger foe against Apple, Garmin and the cheap wearable device makers.
The stock is still a “show me” investment though, especially if holiday sales are underwhelming.
As of this writing, Chris Lau had no position in any of the stocks mentioned. Follow him on Twitter.
