Here’s Why I’m Bullish on Fitbit Inc.
Fitbit Inc. (NYSE:FIT), the leading manufacturer of fitness tracking devices, reported earnings on Monday and beat both revenue and earnings expectations by a considerable margin. FIT stock, however, fell by over seven percent on Tuesday’s premarket trade amid news of a secondary stock offering. Fitbit is planning to issue 23 million more shares of FIT stock, which will dilute current stockholders’ returns.
The news has investors worried, but I, on the contrary, am very optimistic about the company’s future and see an opportunity in FIT stock’s recent dip. Here are the three reasons why I’m bullish on Fitbit stock.
Hardware + Software Ecosystem
Fitbit management understands the need of time and is heavily investing, not only on hardware R&D, but also on software. Fitbit’s fitness tracking devices are supported by a user-friendly and interactive application that is widely available on all OS platforms for over 200 different devices, on both mobile and desktop. Fitbit has effectively created its own ecosystem-a social network, per se-which lets you share your activity with your friends across other social networks, including Facebook, Instagram, and Twitter.
The importance of a software-backed hardware can be gauged from GoPro, Inc.’s (NYSE:GPRO) meager sales performance in the latest quarter, which was largely affected by the lack of a similar ecosystem. GoPro may have great camera hardware, but the absence of supporting software has negatively affected user engagement with the product.
Fitbit, on the other hand, has been heavily focused on improving user experience by continuous and timely upgrades in Fitbit app’s user interface (UI). In the latest quarter, the company has further improved the UI–adding more features and making it more engaging. And the best part is that the UI is tailored to region-specific user preferences, such that the features for the Chinese market vary from the North American market.
Raw International Markets
Fitbit has some attractive and largely untapped growth opportunities in the international markets. The company may, for now, be generating most of its revenue from within the U.S. but is, at the same time, rapidly expanding worldwide. It saw a massive triple digit year-over-year (YOY) revenue growth in the Asia Pacific region, which emerged as the highest growth region in the latest quarter.
Fitbit is actively moving to capture a good chunk of market share in this region, with a strong focus on two of the most populous countries in the world, China and India, both of which stand to contribute to revenue growth from higher sales volume going forward.
|Revenue Share||Revenue Growth YOY|
(Source: “Fitbit’s (FIT) Q3 Conference Call Transcript,” Seeking Alpha, Nov. 3, 2015.)
Fitbit currently leads the fitness-tracking devices market with an 88% market revenue share in the U.S. alone. The company’s product is well-differentiated from competing Microsoft Band and Apple Watch, both of which are not as power-efficient as Fitbit bands which are hailed for their longer battery time.
The only close competitor is Garmin Ltd. (NASDAQ:GRMN), whose lackluster earnings report last week with little mention of its fitness bands, is evidence of Fitbit’s rising dominance in the industry. (Source: “Fitbit’s (FIT) Q3 Conference Call Transcript,” Seeking Alpha, Nov. 3, 2015.)
The Bottom Line on FIT Stock
Financially, Fitbit has a strong cash position and no debt on its balance sheet. It is understandable that FIT stockholders are wary of management’s move to go for a secondary offering, which made little sense right after its initial public offering. Nonetheless, now that they have, management should put it to proper use.
Since Fitbit management is already vowing to step up R&D and has hinted on some new and improved product launches in 2016, Fitbit stockholders should gear up for some positive surprises going forward, both in hardware and software. The company has already guided for a strong fourth quarter.
Bottom line, I’m rooting for FIT stock.