The third-quarter results of Fitbit (NYSE:FIT) and Apple (NASDAQ:AAPL) indicated that the companies and their stocks are on directly opposite trajectories. Specifically, Fitbit stock is beating expectations and has a multitude of potentially powerful positive catalysts, while Apple stock is missing expectations and has no powerful positive catalysts and multiple potentially powerful negative catalysts.
Ahead of Fitbit’s results, I predicted that Fitbit stock wouldn’t rally too much because of worries about tariffs on Chinese products. In a way, I was wrong as FIT stock has surged about 25% since its results were announced. However, in a way I was also right, as despite its strong results and the Q3 profit it reported, Fitbit stock is still trading at a trailing price to sales ratio of below one.
Meanwhile, Apple stock has taken a very significant hit, dropping nearly 10% since the company announced its results.
Multiple Positive Catalysts Will Propel Fitbit Stock Higher
Fitbit’s smartwatches look poised to emulate Android’s performance in the smartphone category. I believe that, just as many more Android smartphones have been sold globally than iPhones, Fitbit’s smartwatches are well on their way to significantly outselling the Apple Watch.
As I have noted multiple times in the past, Fitbit’s lower prices, much longer battery life, and superior ability to evaluate people’s health compared with the Apple Watch make its smartwatches much more appealing than the iPhone maker’s products.
Fitbit noted on its earnings conference call that it has become the number two smartwatch player in the U.S., behind AAPL, and that the sales of its smartwatches and trackers increased versus Q2. FIT also pointed out that even though its smartwatches launched just a year ago, they already generate 49% of Fitbit’s overall revenue.
Additionally, in a sign that Fitbit could follow in the footsteps of Android’s dominance in many countries outside the U.S., the company’s international revenue surged 10% year-over-year last quarter. Furthermore, the company noted that sales of the Versa smartwatch “continue to be solid,” and said it expects its free cash flow to come in at about $90 million. Of course, as all of these positive trends continue, they will further boost Fitbit stock going forward.
Meanwhile, there are multiple signs that Fitbit and Fitbit stock can benefit significantly from improving people’s health by getting them to exercise more, alerting them to potential problems, and helping them to manage chronic diseases.
Last quarter, FIT launched Fitbit Care, a platform which provides “health coaching and virtual care.” Humana (NYSE:HUM) validated it by making the platform its preferred solution for more than five million of its members. Presumably Fitbit stock will obtain significant revenue from that deal, and the company indicated that it will eventually generate a meaningful amount of its revenue from insurers and employers who want to keep the people they insure and their employers healthy in order to contain their costs.
Furthermore, FIT said that the revenue from Fitbit Care and other non-device solutions for improving people’s health jumped 26% year-over-year in Q3. But the company did add that revenue from those sources still accounted for less than 10% of its total revenue. However, in the longer term ,that high-margin revenue stream is likely to become significant, boosting Fitbit stock.
Fitbit noted that it’s continuing to conduct clinical trials in conjunction with the FDA in an effort to validate its devices’ ability to “detect some of our more advancing health conditions such as apnea and afib.” In a hint that the FDA is close to approving Fitbit’s devices for such uses, the company said, “we’re working closely with the FDA to figure out when the earliest that we can roll out (diagnostic capabilities) to our users.”
The Many Problems Facing Apple Stock
Apple stock has largely become a one-trick pony, and that pony is showing signs of slowing down significantly. Of course, I’m referring to the iPhone. Unit sales of iPhones came in below expectations last quarter.
Moreover, Apple’s decision to avoid disclosing iPhone unit sales in the future indicates that it believes that sales of the device are going to decline going forward. That’s very bad news for Apple stock, since the iPhone accounts for a majority of the company’s revenue and profits. Additionally, Apple provided weak holiday season guidance, indicating that its new phones aren’t selling too well.
Apple faces other meaningful threats going forward. China has been a large market for Apple’s products. In the wake of the trade conflict between China and the U.S., the Asian country’s economy is likely to slow meaningfully and anti-American sentiment could greatly increase there. Both of those trends could cause sales of iPhones in China to drop by large amounts.
People who are optimistic about Apple stock like to talk about the growth and huge potential of the company’s services business. But by charging very high prices for iPhones, Apple will cause many iPhone users to buy new cell phones made by other companies. As that phenomenon becomes more widespread, demand for the company’s services will not rise as quickly as expected.
Furthermore, as I noted earlier, Fitbit’s products are poised to supplant Apple Watch.
Finally, as I have pointed out for some time, and many others are realizing, Apple has not innovated very much under Tim Cook’s leadership. With Cook at the helm, most of the company’s major initiatives, from providing a substitute for cable TV to healthcare innovations to driverless cars have not really gotten off the ground. And the changes he’s made to the company’s products haven’t been game changers. As I noted in a previous column, Apple under Tim Cook has become similar to Microsoft (NASDAQ:MSFT)under Steve Ballmer circa 2002: a company that doesn’t innovate very much and is thus poised to be supplanted by the competition. Of course, that situation doesn’t bode very well for Apple stock.
The Bottom Line on Fitbit Stock and Apple Stock
Fitbit’s products are superior to the Apple Watch, and Fitbit stock has many upcoming, potential, positive catalysts.
Moreover, the valuation of Fitbit stock remains quite low. Conversely, Apple stock faces many threats and the company is failing to innovate effectively. As a result, investors should sell Apple stock and buy Fitbit stock.
As of this writing, the author owned Fitbit stock
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