Fitbit (NYSE:FIT) will release its earnings results this week. The reporting of financial metrics will take place after the closing bell on Monday February 22nd. Shares of FIT have taken it on the chin, down 47% from the IPO debut and over 70% from their all-time high. The worst part of this decline is the predictability of the price action.
Fitbit is a great product. Unfortunately, one has to complete the analysis of the product characterization that would also include its usefulness. What many investors understand is that nobody actually needs a Fitbit and the product fits into one of the absolute smallest consumer goods categories represented in the market place, health and wellness sporting goods. For Fitbit, the consumer has to want the product because there is no essential need for the product. Fitbit is not a beverage, a shelter, a food or clothing. One just does not need the device. Additionally, a Fitbit health tracker and monitoring device does not solve any problems for the consumer, it simply tracks, monitors and displays prompts that issue feedback from the tracking. If the consumer wants to establish a beneficial relationship with their overall health and wellness they will have to take additional "steps" beyond monitoring. And millions of people have and do take those additional steps daily if not weekly. At the same time it should be recognized that greater than 40% of initial Fitbit purchases become unused shortly after purchasing. This subject matter is known as attrition and with Fitbit selling over 12mm devices, yet maintaining only just over 6.5mm in active use, the attrition rate not only validates the usefulness of the device, but identifies the longstanding problem for non-essential consumer goods.
With FIT share lockup now out of the way and investors that greatly desired to exit their participation in the company, existing and potential investors eagerly await the company's upcoming quarterly release. For the quarter that ended January, the San Francisco-based company is expected to earn 25 cents per share on revenue of $647.82 million. For the full year, earnings are projected to be 97 cents per share on $1.8 billion in revenue.
In previous publications dating back to the pre-market on January 4th of this year, I warned investors with greatly enhanced analytical perspective that wasn't yet available for readers and with regards to understanding consumer product goods. Fitbit, despite it being touted as a technology company, is little more than a consumer packaged goods company. While its products encapsulate technology, they do so in a packaged good that is delivered to consumers. With dozens of articles written in support of the sharp revenue increases for the Fitbit product line, these articles continuously lacked the dissemination of similar products and technologies that attract early adopters and fail to grow longer term. Not a single article disseminated the greatest portion of sales growth comes from distribution gains and pipeline builds. Consumer takeaway was never once mentioned to be far less than that of inventory builds and distribution gains. No articles denoted the correlation between initial rate of growth determined by these inventory builds and pipeline gains which would subside and carry with them slowing growth. But this is what analysts understand to be the truth and which is supported throughout the history of the consumer goods market. That is why revenue growth is no longer expected to be triple digits. Analysts largely expect the company to forecast revenue growth for 2016 to be in the 30-40% range, with the average coming in at 34.4 percent. It's quite possible that Fitbit could grow revenues beyond this expectation, but in no way will they be able to grow in the triple-digit range going forward.
I can't tell you how many times investors lean on the side of the argument that Fitbit is not GoPro (NASDAQ:GPRO) and therefore it should not trade in tandem or like GPRO shares. It's one of the most inaccurate statements or displays of sentiment pervading these investors' understanding as to why the stock has performed as it has to date. Just like GoPro products, nobody actually needs a Fitibt, regardless of how great they are with regard to functionality. Hey, a plane is a great source of transportation, but I'm not about to go out and by one. For that matter, I'm even less likely to use it if I do buy such a non-essential product. The bottom line is that nobody needs a GoPro anymore than they need a Fitbit. If you believe the health and wellness aspect of Fitbit products lend themselves to be more compelling of a product than does a camera, then ask SodaStream (NASDAQ:SODA) how that consideration has been working for them. Yet another non-essential consumer good with a focus on the health and wellness category. How faddish is most every single diet ever known? Human indulgence is a problem of persistence and we are our own worst enemy in this realm of sin - a Fitbit device is likely the last variable to address human nature. But Oprah Winfrey looks marvelous doesn't she?
In a more recent article titled "Fitbit: Ready To Climb," the author discusses the Fitbit product assortment. I'd like to congratulate the author on the timing and sentiment with regards to the title of the article. As I have made two prosperous short-term trades during the downtrend in FIT shares, the author of Fitbit: Ready To Climb" may have called a bottom in the stock, at least for the time being. Since the publication of the article, shares have risen more than 10% and seem to have bottomed for the moment. And despite my several warnings and disseminated trading opportunities in shares of FIT, I also have articulated and published articles denoting my belief that shares would also rebound in the near term and possibly achieve a higher multiple for a period of time. Unfortunately, the near-term shareholder base will have to constitute a great many more retail investors as longer duration institutional investors will be participating less and less in the Fitbit story. So if you are a "run of the mill" every day retail investor, please do yourself a favor and understand what happens to a stock longer term when the construction of the shareholder float becomes less populated with institutional investors and/or longer-term investors. It happened to GoPro, it happened to El Pollo Loco (NASDAQ:LOCO), it happened to SodaStream, it happened to Crocs (NASDAQ:CROX) and so on and so on. And please don't confuse these exampled companies with the notion of "fad." In no way are these fads that actually disappear over time - they still exist. Fitibit is no fad and it doesn't have to be to deliver less than expected to shareholders. The fad argument is irrelevant in my opinion and is why I haven't articulated any credence to the suggestion in previous publications.
In the "Fitbit: Ready to Climb" article the author denotes the following for consideration:
For us, 2016 could be all about the Fitbit Alta which is pictured at the very top. We feel it looks sleek, stylish, offers users the full tracking works, and perhaps most importantly, priced at $129.95, is extremely affordable. The new device, teamed with the rise in wages and disposable income levels in the United States, could be a real boost to the top line.
I would agree that the Fitbit Alta looks like a strong product offering and comes with it greater applicability to users. Unfortunately, the early adopters and those who have attritioned from the product line leave Fitbit with less potential sales for the Alta than its predecessor products. Having said that, based on consumption statistics proliferating in the retail sector throughout 2015 and as those income levels were rising in the United States, I'd hardly look to these variables as leading indicators. Based on Jack In The Box (NASDAQ:JACK) results and guidance for 2016, one might even suggest that we aren't even willing to buy ourselves a hamburger for a couple of bucks let alone a fitness tracker for greater than $100 as our incomes are rising. It's all relative I guess, but the example suggests that a product's attractiveness would better be defined by its usefulness and not be determined by outside influence like those that have never worked when governments get involved in the whole health and wellness aspects of our societal life.
Look, I like the product on its ability to do what Fitbit products do. But unfortunately, like many, I found the tedious nature of the product that necessitates active participation in the tracking beyond the data the device tracks quite annoying. As such, my Fitbit has gone unused after the first month of receiving the device. I don't want to do everything a health tracker requires me to do to advantage myself from its use. That's probably why those corporate account users of Fitbit will likely not actively use the product as well and why these corporate account holders have to incentive the usage of the device.
I'm expecting Fitbit to report, as many do, great numbers and even reasonably strong 2016 guidance. But I don't believe that relevant investors see this story as anything different than other consumer packaged goods stories before it. Longer term, and that is what is most important with investing rather than trading, the stock may not achieve the success from its early IPO price action. Once a multiple is depleted to the extent it has been depleted in FIT shares, it is unlikely to revisit a similar multiple in the future. It's not impossible, just unlikely. Furthermore, I do expect shares of FIT to improve in price over the near- to mid-term, but to be followed by diminishing returns and share prices longer term. As evidenced in the sales data over the last eight-week period in the POS screen shots within, Fitbit product sales are acting exactly as other consumer product goods have in early stages of adoption. Exactly! Of course, I could be wrong with regard to the future, as I'm not able to better understand the potential twists and turns the business model might undergo, but then again, my proliferation of articles on Seeking Alpha tell a different story. Here's to a great quarter for Fitbit and a great 2016. For those who read my previous publications on Fitbit and my favorite Denver Broncos football team, congratulations to the Denver Broncos!
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.