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Time to Cover Your Fitbit Short

- By Akshansh Gandhi

I have been a Fitbit Inc. (FIT) bear for quite a long time and have been recommending investors to short the stock since it was trading in the sub-$20 range. The stock has obviously dipped considerably since then on account of its slower growth, increasing competition and capital expenditure headwinds.

Investors who have been short Fitbit all this while should probably consider covering their positions right now. I am not saying I expect Fitbit to move higher in the foreseeable future--in fact, I expect Fitbit to continue heading lower. Regardless, I think investors should book profits by covering their positions as the risk-reward ratio is not as favorable for Fitbit shorts as it once was.


Fitbit recently released its quarterly results. The company's performance was terrible on all fronts. Fitbit managed to miss all estimates due to tough comparisons and even guided light for the upcoming quarter. Yet shares moved higher as the market had already priced in the debacle.

This is not a sign that Fitbit has bottomed however. The company can continue moving lower on the back of increasing competition and a dying fad, but the fact the stock did not fall after reporting a terrible quarter indicates its worst days might be behind it. For this reason, I think the risk-reward ratio is not favorable enough to consider shorting Fitbit at current levels.

The post-earnings rise was probably a dead cat bounce. Fitbit crashed almost 30% twice after reporting terrible results prior to the latest quarter. Hence, I do not think Fitbit has bottomed and the recent positive reaction to the earnings was just a dead cat bounce that investors should not look too much into. Fitbit is still a falling knife and investors should definitely wait for it to hit the floor before thinking about buying it.

Conclusion

While there is still a high chance of Fitbit heading lower, I do not think investors should continue shorting it. With the stock near 52-week lows, I believe it is the ideal time to cover the short position and book profits. Going forward, investors should wait for Fitbit to bottom out before considering taking a long position. As of now, I think investors should watch the stock from the sidelines.

Disclosure: No position.

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This article first appeared on GuruFocus.