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Fitbit Inc (NYSE:FIT) Stock Still Has A Lot of Work To Do

Vince Martin

Fitbit Inc (NYSE:FIT) stock has finally broken out. Fitbit stock traded mostly between $5 and $6 after plunging. This following preliminary Q4 results in late January. Since then, however, FIT stock has climbed sharply, hitting an 8-month high near $7 before pulling back modestly.

Source: Fitbit

And there has been some good news of late, notably early optimism toward the Ionic smartwatch — to be launched later this year. InvestorPlace columnist Larry Ramer argued the product would give a boost to FIT stock, and he may be right. A new partnership for glucose monitoring sent Fitbit stock soaring earlier this month, and overall optimism toward smartwatches seems to be increasing.

Still, I remain somewhat skeptical on FIT stock. The move from $5 to almost $7 doesn’t sound like much, but in the context of Fitbit’s enterprise value actually is a huge move. The catalysts for growth might not be as large as some FIT bulls suggest. And competition is fierce — and getting fiercer.

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There remains a path to big upside in Fitbit stock. I’m just not sure how far down that path the company actually will wind up going.

Good News For Fitbit Stock…Right?

The biggest recent move for Fitbit stock came off the back of its glucose monitoring announcement. FIT stock gained almost 10% on the news. The partnership with DexCom, Inc (NASDAQ:DXCM) is supposed to bring CGM (Continuous Glucose Monitoring) data to Fitbit products going forward.

It sounds like an intriguing deal for Fitbit, one that might make the Ionic (and subsequent products) attractive, if not necessary, for the growing diabetic population worldwide. But, in actuality, the announcement seems like it should have had a much more limited impact on Fitbit stock.

For one, the partnership at the moment is in its earliest stages. DexCom and Fitbit announced a plan to work together — with availability “as soon as possible in 2018.” Secondly, the partnership is for data only, and it’s not as if Fitbit gets exclusive rights to that data. In fact, DexCom already has smartphone apps that serve the same purpose — including one for Apple Inc (NASDAQ:AAPL) iOs devices.

That, of course, includes the Apple Watch. Apple in fact talked up CGM capabilities at its event just a few days ago.  So the idea that the DexCom partnership somehow differentiates Fitbit smartwatches going forward — the lesson investors took from the announcement — seems optimistic, to say the least.

Fitbit Needs To Beat Apple — And A Few Others

As far as the Ionic launch goes, the company is going to have to fight off Apple for market share, particularly in the key holiday season. That seems a potentially difficult task. Apple is benefiting from the hoopla surrounding the Apple X and is beating Fitbit to market. It’s also clearly targeting the health-tracking technology and other aspects that are supposed to drive Fitbit sales.

Of course, it’s not just Apple. Samsung‘s line of Gear devices is being updated. Garmin Ltd (NASDAQ:GRMN) already has a strong presence, and recently launched its new “vivosport.” A host of devices run out the Android operating system from Alphabet Inc (NASDAQ:GOOGL).

Can Fitbit increase revenue in such a crowded market, even assuming the category grows? Probably. But it’s far from guaranteed. And investors betting on a big holiday season from Fitbit should remember that both Q4 2015 and Q4 2016 wound up being rather ugly for sales, profits and Fitbit stock.

FIT Stock

Meanwhile, the optimism, including a decent-sized pullback on Friday, has resulted in a big move in the valuation of FIT stock. The company has $676 million in cash on the balance sheet, or almost $3 per share. That means the move from near $5 in mid-August to almost $7 less than a month later implied a roughly 80% increase in the company’s enterprise value.

Again, going from $5.10 to $6.80 doesn’t sound like a lot. In the context of what investors are willing to pay for the actual Fitbit business, it is.

I’m skeptical the news here is that good. At the end of the day, the story surrounding FIT stock hasn’t changed much. Competition is intense, the business is unprofitable (at least for now), and a company that hasn’t executed all that well needs to nail its Ionic launch.

It’s a “this time is different” type of story. But I still don’t see enough to bet that this time actually will be different.

As of this writing, Vince Martin has no positions in any securities mentioned.

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