Why the FIT Stock Rally Ain’t Over Yet

Fitbit (FIT) stock has been on an absolute rampage since its red-hot IPO hit Wall Street less than two weeks ago. After pricing at $20 per share, the FIT stock price roared 48% higher on its first day of trading, closing just under $30.

fitbit fit stock priceSince then shares of the company — which is a leader in the wearable fitness product market — have generally continued a stubborn march higher, interrupted only by a brief pullback at the end of last week.

Although its only been public for the blink of an eye, it’s becoming clear to me — and many other investors, by the looks of it — that FIT stock is one of the most attractive growth opportunities in the stock market today. Here’s why it’s such a special company and why, even after the run-up, Fitbit stock is a buy.

Analysts Taking Notice

The FIT stock price got a big boost yesterday after RBC Capital became the first big-name Wall Street research firm to stick its neck out and take a position on the young company. RBC initiated coverage with an “outperform” rating and a $45 price target, and by the end of the day, Fitbit stock was 15% higher.

But the rally carried over into today, and in early trading FIT stock was trading as much as 7% higher, cracking the $40 level for the first time. Because RBC was the first to give its opinion on Fitbit stock, Wall Street listened intently. And what it heard was music to its ears.

RBC believes (I’m paraphrasing):

  • Fitbit’s addressable market is currently around $25 billion, although that’s rapidly growing, and will double to $50 billion in size soon.
  • Wearables are not a fad. Ninety million devices to date have been sold and numbers don’t lie.
  • While Apple (AAPL) and the much-hyped Apple Watch do pose a threat to FIT stock and its flagship product line, the fact that the Apple Watch goes for the higher market ($350-$1,000+) and Fitbit courts the lower end ($60-$250) means there’s less cause for concern.

With FIT stock now trading at double its $20 IPO price, I’m sure insiders are happy they didn’t price the IPO at the $17 to $19 range, and they’re certainly glad they didn’t go with the original $14 to $16 range.

But frankly, they still blew the pricing of the FIT IPO, and as an investor, that’s fine with me. Two days before the company went public, I did some digging and concluded that FIT stock was going to be a steal when it debuted:

“If Fitbit stock, for some bizarre reason, ever pulls a Facebook (FB) and pulls back from its initial offering price, I will seriously consider piling into FIT stock.

Unfortunately, that scenario is pretty unlikely. We’ll sooner see the Fitbit stock price at $36 per share than $16 per share, I’m certain of that.”

So certain, in fact, that I plunged a material part of my portfolio into FIT stock on its first day of trading, despite it being up about 50% on the day. My rationale was simple: Fitbit’s growth was too explosive to ignore, and the market wasn’t yet charging the same multiples for that growth that it demanded elsewhere.

Fitbit’s first-quarter revenue in 2015 was more than three times what it was just a year before. Its margins improved, and diluted earnings per share rose 450%.

I’m not quite sure why Fitbit has been underestimated by Wall Street: Maybe it’s the concerns that the big boys like AAPL, Under Armour (UA), Google (GOOG, GOOGL), and even Microsoft (MSFT) will come in and crush Fitbit, but no one’s mounted a serious offensive against the company to date, and the size of the market is so big that there’s room for a few big players.

I went back and loaded up on some more FIT stock late last week when it pulled back, and I’m crossing my fingers for another pullback soon. But after the bullish call by RBC, I doubt investors will sleep on this stock again for a long, long time. I happen to think that after the 200% sales growth in the first quarter, RBC’s call for revenue to rise 83% on the year implies a dramatic and unlikely deceleration in sales growth in the last three quarters of the year.

In other words, the next time Fitbit reports earnings, I think investors will be pleasantly surprised.

As of this writing, John Divine was long shares of FIT stock and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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