FIT Stock: 1 Simple Reason to Be Bullish on Fitbit Inc

FIT StockWhat to Expect from FIT Stock

Fitbit Inc (NYSE:FIT) reports after the bell today and holders of FIT stock are already having a nervous breakdown. Analyst downgrades and price cuts have hammered the stock, but some bullish signals are being overlooked.

Fitbit is being labeled a “fad” and bears believe its appeal will, sooner or later, fade away. They compare it with the likes of GoPro Inc (NYSE:GPRO), using parallels such as both the companies essentially sell a wearable technology device that can lose its appeal as competition gets stiffer.

The analogy used is fallacious and wrong on so many levels. Let me explain how…

Firstly, unlike GoPro, Fitbit has an established brand name and enjoys market leadership in the fitness wearables industry, beating the much bigger Apple and Garmin. (Source: “Worldwide Wearables Market Soars in the Third Quarter,” International Data Corporation, December 3, 2015.)

Secondly, Fitbit employs a unique business model that sets it apart from GoPro. Unlike GoPro, which only sells directly to customers, Fitbit uses a two-pronged selling strategy.

The first is the standard B2C (business-to-customer) selling, whereby it advertises and sells directly to customers through its web site or retailers. The other is the unique B2B (business-to-business) selling. This is where it differentiates itself from ordinary wearable technology companies.

Fitbit has created a strong corporate wellness program. Under this program, the company sells its bands to other corporations as part of building fitness awareness. The corporate orders are taken in bulk and bring in a solid stream of revenue.

Take, for instance, the big corporations like Bank of America, Target, and Time Warner Cable that have become a part of the program by posting big orders for Fitbit bands for their employees. So far, the strategy has worked well for Fitbit.

Take a look at its past performance for an idea. Since going public in the summer of 2015, the company has reported two quarters and managed to surprise the market by a huge margin each time. This quarter is expected to be no different.

I’ve one strong reason to believe so.

Recall that Fitbit was a massive hit during the holiday season that fell in the fourth quarter. Fitbit bands were door-busters at Target and Best Buy—the two retailers that reported strongest holiday season sales. (Source: “Fitbit Was A ‘Winner’ Over Black Friday Weekend: Stifel,” Barron’s, November 30, 2015.)

Plus, the company delivered better-than-expected guidance for the fourth quarter in its third-quarter call. Fitbit expects revenue to come in between $620 million and $650 million and earnings per share to be between $0.20 and $0.25. (Source: “Third Quarter Press Release,” Fitbit Investor Relations, November 2, 2015.) Street estimates hover around the higher end of the company’s guidance.

I’m seeing a Fitbit Q4 earnings beat in the cards.

The Bottom Line on FIT Stock

Fitbit’s fourth-quarter earnings report is expected to deliver more good news. However, future outlook may be kept conservative by the management, as competition in the industry grows stiffer. Nonetheless, the company still enjoys leadership through its ingenious selling strategy.

Investors should, however, take note of the two risks Fitbit has taken this year. Two of its new launches—“Fitbit Blaze” and “Fitbit Alta”—both differ from Fitbit’s previous bands. The Fitbit Blaze is a smartwatch-cum-fitness tracker that takes after the “Apple Watch.” In comparison, the Fitbit Alta is a more fashion-forward band made for the female target market.

It remains to be seen how these new bets will fare this year, but rest assured, Fitbit has more room to grow than the bears see.

The bottom line: I’m seeing strong upside in FIT stock in 2016.