Bull/Bear Case for Fitbit Inc (FIT)


There are reasons for both the bulls and bears when it comes to Fitbit Inc (NYSE:FIT). One of the factors is its dominant market share in fitness tracking device with competitive pricing, The usefulness of the firms tracking devices have been acknowledged by medical fraternity. Apple Inc. (NASDAQ:AAPL)’s Apple Watch is completely in a different league and cannot be compared as it has more of a fashion angle as much as fitness. Fitbit’s stock has witnessed a sharp decline in recent times. Investors were not at all happy with some of its new products. Aside from that, the expiry of lock-up period from its IPO added to the negative sentiments and created more supply for the stock. Let’s look at the some of the factors for both the bears and the bulls before taking a call.

Bear Case

  1. Expiry of Lock Up

Fitbit Inc (NYSE:FIT) shares face the pressure of sellers as result of the availability of more shares following the expiry of the lock-up period. Its stock peaked at $51.90 after favorable news and positive ratings were assigned to it by different brokerages with most of them advising the investors to shop the stock. The company came up with its IPO only in June at $20 a share. However, the fitness tracking device making firm came up with a follow-on offering in November. Though the company indicated that it needed funds to invest in R&D, working capital, and other corporate purposes, investors were not fully convinced. The net impact was that the stock price was dragged down as the increased outstanding shares will hurt EPS growth.

  1. Short Sellers

The expiry of lock-up period meant that there will be more floating stocks of Fitbit Inc (NYSE:FIT) thus preventing the stock to move higher. Shareholders, whose shares were locked, are not guaranteed to sell their shares though they could do it anytime they want. However, the expectation would increase that it will bring down the share price and short sellers took advantage of the situation. Now, the market and the stock were not favorably placed. Therefore, there will be more short-sellers, which meant further downside pressure cannot be ruled out.

  1. Product Selection

During the last CES, Fitbit Inc (NYSE:FIT) unveiled their Blaze smartwatch for $200 inviting mixed reviews from the users, as well as, the analysts. The company currently has eight wearable trackers. The biggest question that is haunting the investors mind was that whether these tactics would lift sales by spreading the target base. Alternatively, these devices could cannibalize and create confusion for customers. The company’s products can be split into three aspects like every day, active, and performance devices. Their pricing differs like $130, $150 – $200, and $250 respectively. The company claimed that nearly four-fifth of its sales revenue came from three devices, i.e. Charge, Charge HR and the Surge. That meant the other devices performance need to be improved or fell short of consumers expectations.

Apple Inc. (NASDAQ:AAPL) is a fear for Fitbit Inc (NYSE:FIT) investors. Therefore, trying to bring in a device to compete with Apple Watch in the every day sense could be difficult.  There are strong doubts among some sections of the people that its Blaze or Alta would succeed. Also, it will find the going to be tough to attract consumers in the premium market as consumers in that segment will not worry about the pricing but bothered more about the quality and fashion sense.  Instead, it could have focused on areas where it has the strength and where others continued to have a weakness. The company could have gone for new sensor technology. Fitbit’s devices are loved by fitness enthusiasts.

Bull Case

  1. 4Q Results

Fitbit Inc (NYSE:FIT) will be releasing its fourth quarter numbers on February 22. Wall Street analysts are expecting the company to report 75% jump in revenue to $649 million and earnings of 25 cents a share for the fourth quarter. Sterne Agee CRT analyst, Rob Cihra, believes that the company would beat the street by a better margin. Analysts expect the fitness tracker to earn three cents a share more than the consensus and $21 million more than the Street predictions. The optimism was based on the estimated sale of 7.9 million units in the December quarter.

  1. Performance in Holiday Season

During the last holiday season, Fitbit Inc (NYSE:FIT) was on the hot lists for gifts. The company’s Charge HR occupied the numerouno slot in Amazon.com, Inc. (NASDAQ:AMZN)’s best-selling product list for health and personal care. In the same way, the fitness tracker firm was able to hold on to the four of the first ten slots in the category. The advantage was its device pricing, which was $79 – $145. There was no other wearable in the top ten lists since the rest of the list contained only toilet papers, paper towels, batteries, and disinfecting wipes.

  1. Connected Health and Fitness Device

As the healthcare costs increase, there is a strong desire among the people to focus on health conscious issues. Fitbit Inc (NYSE:FIT) is poised to help the people with its connected health, as well as, fitness devices. Most recently the World Health Organization stressed that if the citizens could take care of themselves, then the healthcare costs around the world would decline significantly. The global health organization believes that higher physical activity was societal and not just an individual issue. Therefore, the WHO demanded a multi-sectorial, disciplinary, and population-based relevant approach. The wearable addresses the issue raised by WHO by monitoring the physical activities of the users. Therefore, demand for its product can continue.

Conclusion

Fitbit Inc (NYSE:FIT) shares were trading well above the IPO price until a few months ago. Its follow-on offering, entry into the luxury segment, and the expiry of lock up-shares have also made investors feel jittery. One of the reasons for it was the proof of other firms, which entered the IPO scenes most recently, delivering poor returns after a strong run. There is no doubt that its product dominates currently. Worries about competition from Apple and the company’s growth as it tries to expand from trackers to more smart devices have kept the stock down.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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