Fitbit Inc (NYSE:FIT) stock is having a sell-off, even after it beat Wall Street’s expectations in both revenue and earnings. Like many companies in the hardware business, sentiment has been bearish since last summer. Does Fitbit stock still have a chance?
The answer is yes. But before we move on to why Fitbit stock could still recover, let’s take a look at why it’s down so much.
First, the stock market prefers Internet stocks to makers of hardware devices. You see, for users to sign up on Facebook, they don’t really need to take out their wallet. For a hardware device company to grow its userbase, it would need to convince potential consumers to buy its product.
As a result, device makers like Fitbit were the biggest losers when the stock market tumbled last summer. Other than Fitbit, action camera maker GoPro Inc (NASDAQ:GPRO) also plunged an enormous amount. Even the mighty “iPhone”-maker Apple Inc. (NASDAQ:AAPL) received a 27% haircut in its stock price since last July.
The reason why FIT stock dropped so much on Tuesday was not its performance in the previous quarter, but its guidance for the current one.
For the first quarter of 2016, Fitbit expects its revenue to be in the range of $420 million to $440 million and adjusted earnings per share to come in between $0.00 and $0.02. Analysts were expecting earnings of $0.23 per share on revenue of $485 million in the first quarter. (Source: “4Q15 Earnings Press Release,” Fitbit Inc, February 22, 2016.)
So, Fitbit’s guidance wasn’t as good as expected. But if you look at how the company arrived at the projection, things might not be as bad as you think.
Fitbit Set for Success in 2016?
According to Fitbit’s chief financial officer, William Zerella, the first quarter of 2016 is really a product-transition phase. The company is preparing for the launch of its “Alta” fitness wristband and “Blaze” smart fitness watch in March. So right now, Fitbit is discontinuing one of its core products—the “Fitbit Charge.” (Source: “Fitbit CEO James Park on Q4 2015 Results-Earnings Call Transcript,” Seeking Alpha, February 23, 2016.)
What’s happening is that all channels are draining their inventory levels of Charge. The company plans to start initial shipments of the Alta into these channels soon. But Zerella remarked that because of the timing, “no reorders will hit revenue in Q1, and those will start to flow in early Q2.” (Source: Ibid.)
On top of that, the company is also spending heavily to pair the launch with media campaigns around the world. So while FIT stock’s first-quarter results might not be that impressive, they pave the way for success in upcoming quarters.
Fitbit stock bears have always used the argument that the “Apple Watch” will take over Fitbit’s business. However, if you look at what kind of products are offered by each company, you’d see that it’s not really an issue.
The Apple Watch is a smartwatch that starts at $349.00. While it can do many things other than tracking people’s daily activity, it’s also heavier, more expensive, and has much less battery life compared to traditional fitness trackers.
Fitbit’s products, on the other hand, start at $69.95. Moreover, they are small and durable, and they can last days on a single charge. If you just want a no-nonsense fitness tracking device, Fitbit is the way to go.
I’m not saying that the Apple Watch is not a good product. In fact, it’s a great product and its sales have shot through the roof. But if the Apple Watch were to destroy Fitbit, why did Fitbit’s fourth-quarter sales grow more than 90% year-over-year when the Apple Watch was already available?
The Bottom Line on FIT Stock
Despite all the negative sentiment surrounding Fitbit, the company actually did a great job last quarter. Fitbit’s fourth-quarter revenue came in at $711.6 million, a 92.2% increase year-over-year, and easily beat analyst’s expectation of $648.0 million. The company also generated $0.35 in adjusted earnings per share, 40% higher than Wall Street’s expectation of $0.25.
The bottom line: the company is still solid. Moreover, its projections of future results have always been on the conservative side. If the product transition turns out to be a success, investors might warm up to FIT stock again.