Bearish On Fitbit, Bullish On The Fit Trade

| About: Fitbit, Inc. (FIT)

Summary

Fitbit's shares dropping below $16 represents a reasonable opportunity within a defined trading strategy with respect to risk/reward.

The company's coverage has been extensive with many offerings from the analyst community discussing sales trends.

FIT's product line has forced investors to question the longevity of sales and profit growth.

Yesterday, with shares of Fitbit (NYSE:FIT) falling below $16 once again, I decided to entertain a short-term trading opportunity. For many of my readers, you are probably well aware that I frequent and fancy swing trades and do so with a defined set of parameters that are strictly adhered to. These parameters evoke a discipline that when followed have produced a return on invested capital over 75% of the time. It is with this in mind that win, lose or breakeven, I always keep to the discipline. And, so yesterday, with FIT's shares falling below $16, my proprietary alerts established on my trading platform signaled a trading opportunity had arisen with the shares of FIT.

Longer term, I am of the viewpoint that Fitbit will exhibit many pressures surrounding the company, none of the least which is the competitive threat. My concerns for Fitbit that seemingly have reverberated throughout the investment community since the first public publication I offered in the pre-market on January 4th are centered on the business model that employs a singular product line. Secondly, my greatest concern is the utility of the product line. While Fitbit's products are undoubtedly useful and strongly positioned products, they do not exhibit a functional need from society. Additionally, these products don't advance the consumption of additional Fitbit products because each iteration does little to advance the prior iteration. When the attempt is to advance consumption by the company, it comes at the expense of the consumer's wallet and with few additional benefits.

What Investors Know From Reporting

  • Sean Udall, Chief Investment Officer of Quantum Trading Strategies, referring to the upcoming Q4 earnings report stated that Fitbit "could annihilate the quarter."
  • Robert Peck of SunTrust Robinson Humphrey reiterated a Buy rating, and a $48 price target, arguing estimates for Q4, which show a deceleration in sales, could be too low, based on data points he's been tracking that suggest sales were strong: "Our analysis of the consumer interest graph suggests Fitbit not only held its lead against competitors like Jawbone (private), but also managed to increase it as the Holiday Season picked up. A regression analysis of the graph - which explains 75% of the variation in unit sales - implies unit sales of ~7.9M, modestly above our published projection of 7.6M unit sales. Street revenue estimates imply material deceleration in 4Q'15 and 2016, which is belied by positive reports from retailers and strength in app downloads. Consequently, we believe there is scope for upside surprise when FIT reports 4Q'15 results."
  • Charles Anderson with Dougherty & Co. likewise thinks the data from Google searches suggests momentum for the company. "Fitbit had another exceptional week, with astonishing movement up the charts for the Fitbit app among Android users in the U.S., in particular. Obviously, this is the non-Apple (NASDAQ:AAPL) Watch crowd and was similarly a key contributor on Mother's Day and Father's Day 2015. • Google searches for the Fitbit brand last week were up 60% YOY globally; up 38% YOY in the U.S.; and up 178% YOY in the U.K. We also took note of Fitbit re-claiming most-downloaded status in China over Xiaomi last week."
  • Fitbit upgraded to Outperform, valuation favorable, says Raymond James. As previously reported, Raymond James upgraded Fitbit to Outperform from Market Perform and set a $25 price target on shares. Analyst Tavis McCourt said channel check data has been positive with strong category growth and FIT maintaining its dominance. The analyst expects the Fitbit Blaze to sell just fine, but said, more importantly, it adds significant peripheral sales for the company through different watch brands, and should be following later in the year with one or two additional devices. McCourt made no estimate changes and recommends taking advantage of the recent share weakness for this 27% top-line grower.
  • Fitbit's Blaze smartwatch is $150 cheaper than the least expensive Apple Watch model, and (save for the absence of built-in GPS tracking) contains a feature set similar to that of the company's $250 Surge smartwatch. Blaze is declared to have a battery life of up to five days - Apple estimates an 18-hour battery life for the Watch under normal use. Other features include a color touchscreen, on-screen workouts (referred to as FitStar Personal Trainer) via guided instructions and animated images, continuous heart rate tracking, Bluetooth-based call, text, and calendar notifications, automatic sleep tracking, automatic exercise recognition, and smartphone-based GPS tracking. The watch, unveiled ahead of CES (starts tomorrow), will ship in March, the same month Apple reportedly plans to unveil a second-gen Watch.

Within the noted bullet points is a lot of bullish sentiment, information surrounding a new product release and even sales trend analysis. It is important to understand that regarding the sales trend analysis, although being reported as not slowing to the extent quarterly estimates assume, sales are exhibiting slowing growth as predicted and in continuum. This identifies the sales characteristic of a company seeking an opportunity to saturate distribution channels without the ability to increase sales turns on the shelf in kind. But so long as distribution gains are available, sales will continue to grow well into 2016. I would predict upon issuing quarterly results in February, the company would forecast for continued sales growth in 2016, but not include the details surrounding the strength or weakness of same-store sales on a global basis.

I would be of the opinion that most investors have considered the strength of fourth-quarter sales to be disseminated with strength and a reasonably strong forward-looking guidance. Yet, investors have still fled from the stock. While bullish commentary from analysts and investors persist, not in keeping with price target cuts for shares of FIT, the long-term future of Fitbit's sales and the investment community has called profitability into question. Some of these fears may prove to alleviate upon the dissemination of quarterly results and the subsequent quarterly conference call. With a relatively inexperienced management team, investors have decided to devalue shares of FIT in favor of hoping the team can sidestep public landmines that litter the landscape of the company's future. Valuation for shares of FIT, in turn, has become of little consideration given the business model and the forecasted slowing of sales growth that will ultimately lead to gross profit margin issues.

Even with Citigroup (NYSE:C) initiating coverage on Fitbit yesterday, shares could not escape the selling pressure by investors. Citigroup initiated coverage of the stock this with a Buy rating and a $35 price target. Citigroup remains optimistic, pointing out the company's "strong growth potential and cross border expansion."

There is a great deal to consider within this publication, but for the most part, much of the information is rooted in factual representations from the analyst community and shareholder actions. Something investors are hoping to see more of in the future is corporate and healthcare adoption of Fitbit's products. As I've articulated in the past, this is likely a given and until corporates accept the attrition rate of Fitbit's products among new users. Furthermore, the corporate or commercial segment of Fitbit's addressable marketplace is significantly smaller than the consumer market. Having said that, 3,000 Melbourne-based Coles head office staff will be given access to the heavily subsidized FitBits and encouraged to take part in a company-wide wellness program.

"FitBit Wellness works with more than 1,000 companies globally including Target in the US, which has rolled out the fitness trackers to 330,000 of its employees, and tech giant Adobe. In Australia, around 30 companies have teamed up with FitBit, including Wesfarmers (OTCPK:WFAFY), Lendlease (OTCPK:LLESY), IBM (NYSE:IBM) and Medibank (OTC:MDBKY)."

With shares of FIT trading below $16, I'll take that trade. Win, lose or draw and with respect to all the information I've offered and provided in the month of January that has been taken into consideration by the masses, take your mark investors.

Disclosure: I am/we are long FIT.

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.

Additional disclosure: I have initiated a trade on shares of FIT. As a swing trader my defined stop loss is employed at $14.90 for which the trade would be executed if achieved. My profit outlook is defined with a target price of $16.50 a share with the ability to modify this target exit price if so desired and depending on market fluctuations. Investors and traders should consider their own risk tolerance when considering highly volatile short-term trading and I am not promoting the act of short-term trading as a consideration for investors.