Is It Time to Be Bullish on Fitbit Stock?
Fitness tracking wearables manufacturer Fitbit, Inc. (NASDAQ:FIT) has seen the biggest post-initial public offering (IPO) decline since its debut in June this year. All the negative commentary on FIT stock has been heavily weighing down its performance. Two news headlines were the main culprits in driving down the stock price. Here are the two headlines the bears keep bringing up and why I believe their arguments are flawed.
Misfit Does Little Harm to Fitbit
The recent announcement by Fossil Group, Inc. (NASDAQ:FOSL) to buy Fitbit’s competitor, Misfit Wearables, has caused a major setback in FIT stock. But stockholders have little to worry about. Misfit, although a cheaper alternative to the Fitbit brand, fails to compete with a premium product those Fitbit offers.
What sets Fitbit apart from its peers, which included Garmin Ltd., Jawbone, Microsoft Corporation, Misfit, and Apple Inc., is its brand recognition that is solidly linked to the competitive wearables market. This is what has kept Fitbit insulated from domestic competitors as well as its international competitor Xiaomi Inc., which enjoys leadership in the Chinese wearables market.
One thing that’s proving a boon to Fitbit is its strong software that powers its hardware. Fitbit’s “Android” app bags higher ratings on the “Play Store” than Misfit’s. The “iOS” app, however, lags, so the company may want to focus on improving its user experience for its Apple users. I know, I know, Apple has its own wearable tech device, the “Apple Watch,” too. But hey, you can’t compare “Apples” to oranges. Fitbit’s band is essentially a fitness tracker. Comparatively, the Apple Watch is a fancy-looking wearable tech device that I may want to don to a cocktail party, but will conveniently skip on a hectic workout routine.
This is why Fitbit still enjoys top position in the industry, with a hold over 24% of the market. (Source: “Worldwide Wearables Marketshare,” IDC, Aug. 27, 2015.) Well, this, and the ability of device to work with both Android and iOS platforms, allowing it access to a greater chunk of the market.
Secondary Offering? Not to Worry!
The second major headline that has the bears talking is news of Fitbit’s secondary offering, which caused a major dent in the stock’s price last week.
Now, a secondary offering is essentially the antithesis of a stock buyback. Just as a buyback doesn’t create any tangible value for the company, except for decreasing the number of outstanding share count and thus increasing per-share metrics, secondary offerings don’t harm the underlying business, but they do dilute per-share figures. Since the company doesn’t pay a dividend, I don’t see why the market is blowing this news so out of proportion.
Instead, the offering should be welcomed, because this means the company has chosen to go for equity financing instead of debt for its future expansion. This could also be taken to mean that the company has bigger plans in the pipeline, which can only be materialized with more financing. Either way, I’d take this as positive news.
The Bottom Line on FIT Stock
Fitbit may have become another classic example of a hot IPO that’s tanking after a short rally. We may have witnessed it a number of times before, but contrary to popular belief, it’s not always doom and gloom for investors in a newly IPO-ed tech stock. Take, for instance, Facebook, Inc., which has been a great hit in the long run, despite its initial hiccup on the market. If it’s any consolation for prospective investors, Bank of America Corporation has lately upgraded its price target on FIT stock to $36.00.
In a nutshell, I believe Mr. Market has been too irrational in its trades on FIT. I see a promising upside in Fitbit stock.