Why You Should Be Wary Of Fitbit Stock

  • Fitbit shares have crashed after the company issued weak Q1 2016 guidance.
  • Fitbit blamed the weak guidance on the launch of its high-end fitness trackers, Blaze and Alta.
  • There may be more trouble ahead. You should be wary of Fitbit stock right now.

Shares of fitness tracker manufacturer, Fitbit Inc (NYSE:FIT), have crashed more than 26% in the space of two days after the company managed to comfortably beat earnings estimates during its Q4 2015 earnings call, but issued an awful Q1 2016 guidance.

When Fitbit announced that it was planning to launch a high-end fitness tracker, Blaze smartwatch, in March this year, I penned a piece where I argued that Fitbit would have a hard time competing with the likes of Apple (NASDAQ:AAPL) in the high-end niche market. I think we are now beginning to see the first signs of that happening.

5 Day Fitbit Stock Returns


Source: CNN Money

Fitbit’s Q1 guidance looked nothing like the Q4 results it had just announced. Fitbit reported revenue of 711.6M, up a robust 92.2%Y/Y and $63.78M better than the consensus estimate. Unit sales were up 54.7% to 8.2M from 5.3M during the previous year’s comparable quarter. Fitbit's EPS of $0.35 was a healthy 67% Y/Y improvement and $0.10 better than estimates.

It was the company’s Q1 guidance that spooked investors though. Fitbit said that it expects first-quarter revenue of $420M-$440M, the mid-point being well below consensus of $484.6M by analysts. The company said that it expects EBITDA of $5M-$16M, way lower than expectations of $89.9M while projections of EPS of $0.00 to $0.02 compare poorly to The Street’s consensus of $0.23. Fitbit blamed the awful guidance on the global launches of Blaze and Alta adding that the timing of shipments into various sales channels might result in high reorders coming in Q2 rather than Q1. The company blamed the terrible EBITDA and EPS guidance on higher manufacturing costs for the two products, as well as high sales and marketing costs due to extensive media campaigns around the world.

Although Fitbit issued a full-year revenue guidance of $2.4B-$2.5B and EPS of $1.08-$1.20 that was in-line with expectation on Wall Street, the poor Q1 guidance points to serious problems for the company as it tries to transition from a low-end manufacturer of fitness trackers to a high-end player.

It’s lapses like this that allow the competition to eat your lunch, and in Fitbit’s case, a weak first quarter might only help to give a chance to Apple's upcoming smartwatch due for launch in March this year to gain traction. The main reason why Fitbit expects such poor sales during the first quarter is perfectly understandable. Fitbit failed to release updates for its lower end trackers probably because it instead chose to channel its limited resources into Blaze and Alta. The hard part for Fitbit is that Blaze will hit the market around the same time as Apple’s second-generation smartwatch.

Blaze is aimed at the mid and high-end smartwatch market where the Apple Watch belongs. The big advantage it has over Apple Watch is that it will be priced very competitively. Blaze will retail at $200, about $150 cheaper than Apple Watch. But its thin feature set is probably going to make it hard for Blaze to compete favorably against the Apple Watch and Samsung's Gear 2. For instance, despite its stylish design, Blaze lacks basic features such as independent GPS tracking and waterproofing which are considered standard for high-end fitness trackers. It’s going to be interesting to see Blaze go head to head against Apple’s smartwatches, especially the upcoming second-generation product. The popularity of Fitbit’s low-end trackers has been partly to blame for the rather lackluster Apple Watch sales. But with Fitbit now having a rather hard time climbing into Apple’s territory, Apple might very well turn the tables on the company.

Investor Takeaway

Fitbit shares are now down 58% YTD after the latest hammering. There is a good reason why the market is staying away from the shares. When GoPro (NASDAQ:GPRO) first issued lower-than-expected guidance in 2015 due to its new products performing below expectations, the investing world thought that this was just a passing cloud. But GoPro’s woes have rapidly gone from bad to worse. The same thing could very well happen to Fitbit as it tries to transition to the high-end niche market where margins are fatter. Any slip-ups by Fitbit might play directly into Apple’s hands.

Brian Wu Brian Wu   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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