The Ionic Smartwatch Won’t Save Fitbit Inc Stock Now or in the Near Term
Fitbit Inc (NYSE:FIT) stock just can’t seem to catch a break.
Source: Fitbit
Even though the company beat third-quarter revenue and earnings expectations and delivered a better-than-expected guide, FIT stock still fell. It closed down 4.5% on Thursday, losing another 1% in after-hours trading.
Why? The growth narrative is just that broken. The outlook for profitability is just that bleak. And whatever bullish sentiment there was about an Ionic smartwatch-inspired turnaround now appears to be slowly fading.
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Time to get greedy when others are fearful? I don’t think that’s the case here.
Ionic Won’t Inspire A Great Turnaround For Fitbit
Fitbit’s quarter was pretty good from the standpoint that it beat really depressed expectations. Revenues came in better than expected. So did earnings. The guide also pointed to better-than-expected sales and earnings for the full year.
But FIT stock had also rallied into this report. Fitbit launched its Ionic smartwatch in August, and investors bid up the stock on that news because the broad expectation was that this new smartwatch would catalyze a turnaround in the wearables maker’s growth narrative.
From its August lows, FIT stock was up as much as 38%. It was up 24% headed into the third-quarter print. Clearly, the market expected good numbers.
The market got good numbers, but they weren’t good enough. Revenues were down big. Units sold were down big. U.S. demand, usually a leading indicator of international demand, remains weak. Margins are under pressure.
Knocked From Pioneer Perch
At the end of the day, the Fitbit narrative is one wherein revenues are in free-fall due to a lack of demand. Margins are on watch and profitability is a huge question mark even over the next several years.
Plus, the Alta HR and Ionic, Fitbit’s latest-and-greatest products, only accounted for 32% of revenue in the quarter. That really isn’t that great, considering the quarter’s revenue was down 22% year-over-year. In other words, the new products that are supposed to catalyze a turnaround are only accounting for a third of revenue on a hugely depressed revenue base.
That isn’t bullish.
All in all, there is a reason FIT stock has been stuck in the $5 to $7 range for most of 2017. The company pioneered the market for wearables. Once Fitbit proved there was value there, bigger players with more reach and deeper pockets jumped into the game. They innovated where Fitbit didn’t, and now those bigger players control the market. FIT is trying to play catch-up, but that is tough when you are the smaller guy who is losing money every year.
That isn’t to say Fitbit is going to zero. The company does a good job of selling fitness tech products to its core consumer base, but the brand isn’t attracting many new buyers (42% of activations in the quarter came from customers who made repeat purchases). This market is without question growing, but all those new buyers are going to Apple Inc. (NASDAQ:AAPL), Garmin Ltd. (NASDAQ:GRMN), and Samsung Electronics.
That is why FIT’s revenues are getting decimated. The company is rapidly losing market share. This trend won’t reverse anytime soon, meaning FIT stock doesn’t offer much upside from here.
Bottom Line on FIT Stock
Because of this broken narrative and depressed investor sentiment, FIT stock just isn’t worth your time at these levels. It’s trading at a valuation (roughly 0.8x sales) that makes sense for a company with declining sales, big competition, and a bleak profitability outlook.
There is no reason to go bottom fishing with FIT stock. Maybe it rebounds to $7 from here, but this is a trader’s stock. It goes from $5 to $7, but the multi-month trajectory is sideways. I wouldn’t be surprised to see that sideways trend break soon if the Ionic has a poor holiday season.
Bottom line: Stay away. There isn’t anything here for value-oriented, long-term investors.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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