Fitbit: The Under Armour Problem

| About: Fitbit, Inc. (FIT)

Summary

Fitbit hits new lows on competitive threats and GoPro comparison.

The Fitbit app continues leading the category, though Under Armour is a big threat.

Pessimism is extreme, but FIT needs to change the momentum before the stock becomes a buy.

The declines in Fitbit (NYSE:FIT) appear never ending. The stock was at $40 when insiders announced intentions to dump more shares prior to the holidays, and now, it sits around $18.

Strong holiday sales and app downloads weren't good enough to help the stock. My last article demonstrated that these numbers weren't good enough to push the stock higher. Whether insiders use this as motivation or not, the crushing blow to the stock came from Under Armour (NYSE:UA) at the CES.

The valuation gets interesting by the day on Fitbit, but does the company have the size to overcome the retail giant?

Connected Fitness Push

Anybody following Under Armour over the last few years knows that the performance apparel retailer was making a push into the connected fitness sector. The company made high-profile purchases of Endomondo and MyFitnessPal. When combined with MapMyFitness, UA made the claim on its Q4'14 earnings release of having the largest digital health and fitness community.

In October, Under Armour provided the following stats related to the connected fitness endeavors, including an impressive 150 million registered users and 60 million monthly active users:

Click to enlarge

Source: Under Armour presentation

The number far exceeds the users previously presented by Fitbit, though the latest presentations don't provide updated numbers for the ecosystem.

The current Health & Fitness section of Apple's (NASDAQ:AAPL) App Store lists Fitbit with the top downloaded app and Under Armour nipping at its heals with the second and seventh place apps. In previous day, Record by Under Armour was the number three app.

Source: App Annie

Keep in mind, Fitbit has the current lead due to strong holiday sales that encourage consumers to download the related app. Under Armour doesn't have that similar benefit until these new products roll out. Either way, Fitbit will feel the pressure in 2016 holidays where the company might not have the most compelling item.

Enough Damage?

One quickly looking at the stock price might think FIT has seen enough damage. After all, Fitbit actually hit $52 back to start August, and the stock hit a new low at $17.30. The damage is definitely massive considering the fitness-tracking company has produced blowout financials and a strong holiday season.

The problem with the stock for now is that fears will persist that the company repeats the GoPro (NASDAQ:GPRO) collapse. Remember that GoPro was the hot holiday item in 2014 that Fitbit replaced this year. Can the hardware company repeat the success in 2016 with Under Armour and others nipping at its fitness-tracking category?

At this point, one needs to assume that Fitbit doesn't make the same mistake as GoPro and head into the next holiday season without a new product. The company promises several more new products this year after recently releasing the Blaze watch.

Either way, Fitbit is cheap, but the stock still trades at a significantly higher P/S multiple than GoPro. The stock could easily have more downside if the company doesn't execute.

FIT PS Ratio (Forward 1y) Chart

Takeaway

The market is starting to discredit everything that Fitbit does. With a market cap of around $4.2 billion based on 244 million shares outstanding in Q3, my opinion is more neutral on the stock now. Pessimism is at an extreme on the stock, but FIT needs to prove the company can regain momentum and fight off new competition before turning positive on the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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