Fitbit Stock: Is Fitbit, Inc. Just a Fad?

Fitbit StockIs This a Problem for Fitbit Stock?

Fitbit Inc (NYSE:FIT) debuted as a public company a bit more than a year ago. So far, Fitbit stock has not been a stellar performer. It was priced at $20.00 and its opening trade the next day was $30.40. It traded as high as $51.90 a few weeks later and, since then, has fallen more than 70%.

In Fitbit’s initial public offering (IPO) prospectus, it was noted that one of the measures that the company used to “evaluate their business, measure our performance, develop financial forecasts, and make strategic decisions” was “paid active users.” The term was never defined any further in the offering document. (Source: “Form S-1 IPO Registration Statement: Fitbit, Inc.,” May 7, 2015.)

Fitbit has reported earnings as a public company five times since that IPO. The first time that we see the term “active user” is in their fourth-quarter 2015 earnings announcement. But the term “paid” is missing. The press release then offers us a glimpse of a previously not-yet-reported customer category called “registered device users”. These folks are defined as people who have paid for one of two subscriptions or who use a health and fitness tracker on one of their products. The definition does not say whether these users actually pay for that tracker. (Source: “Fitbit Reports $712M Q415 and $1.86B FY15 Revenue; Guides to $2.4 to $2.5B Revenue in FY16,” Fitbit Inc, February 22, 2016.)

After those two mentions of users, Fitbit Inc. never uses the terms again in any of their earnings releases.  While they do discuss “activations,” they don’t quantify the number as they had in that previous announcement. Here’s why I think this matters.

On the day that Fitbit stock first started trading, MarketWatch writer Tim Mullaney wrote a scathing and prescient article about the company.  One of his critiques was that it was a novelty – in other words, a fad. (Source: “Opinion: Why I hate the Fitbit IPO (and you should, too),” MarketWatch, June 18, 2015.)

Is Fitbit’s Novelty Wearing Off?

I have never been a fan of publicly traded companies whose fortunes depend upon either fashions or fads. Novelty always wears off and hot style trends always cool down. To me, Fitbit offers a little bother to investors. The company makes a nifty product that cool celebrities endorse and that people wear even when they are not exercising. In my opinion, Fitbit’s novelty may be wearing off.

To test this theory, Google the search term “Fitbit Drawer”. Your search results will display post after post and image after image of people relegating their Fitbits to a junk or sock drawer. Maybe this is the result of problems with the product.

When you scroll down to the end of Scott Stein’s C|net review of the “Fitbit Charge HR,” you’ll find a small sampling of actual consumer comments (all negative; seriously, not one positive) about Fitbit devices in general. (Source: “Fitbit Charge HR Review,” C|net, November 25, 2015.)

So I’m led to wonder if indeed Fitbit is a cooling fad along the lines of GoPro Inc (NASDAQ: GPRO) or if there is a deeper quality problem. I have no clue, but I do suggest that Fitbit Inc’s nearly $12.5 million inventory buildup in the last quarter may be showing evidence of this phenomenon.

Balance Sheet

(Source: “Fitbit Inc (Filer) CIK: 0001447599,” U.S. Securities and Exchange Commission, August 4, 2016.)

Finally, there is a question mark in my mind (and about the balance sheet that I recreated above) regarding Fitbit’s contingent liabilities, which are not quantified but are definitely discussed in the company’s most recent 10Q filing.

The Bottom Line for FIT Stock

Fitbit Inc is a party to a number of lawsuits, ranging from personal injury claims to patent infringement allegations, false advertising, securities law violations, and unfair business practices. To be sure, companies get sued. It’s part of American culture to sue. This is no surprise. The company is vigorously defending itself on each matter and these lawsuits aren’t noted here to suggest that they have any merit at all. Again, I have no clue. My point is just that these matters put a question mark in my head about what their ultimate cost (if any) may be to Fitbit.

For me, there is enough to ask the salient question: could Fitbit stock disappoint?