Fitbit's Analysis Ahead Of Q4 Earnings

| About: Fitbit, Inc. (FIT)

I have just poured me some fresh coffee. There are a few things more peaceful than sipping your coffee while deep-diving into a company's reports and sales trend. Today, my target is Fitbit (NYSE:FIT), which will be reporting on Monday, Eirik wrote about this a couple of weeks ago. I must say that I am really excited about this research session, as I have followed these guys and gals since they went public. [Disclaimer] I own both stocks in the company and a Charge HR from Fitbit, which I wear daily and get anxious if I don't have it on at night to read my sleep patterns. I digress... Let's start with Fitbit's last earnings release to see where we should set our expectations.

"Revenue of $409 million increased 168% year-over-year, exceeding the high end of our guidance, and adjusted EBITDA nearly doubled. Fitbit's third quarter results demonstrated the continued rapid growth of the Fitbit platform and our team's ability to execute on the tremendous opportunity we see globally, as we help people reach their health and fitness goals."

- James Park, Fitbit co-founder and CEO

As we can read from Park's quote, this is a high-growth company which will more than double its revenues for the full year of 2015 compared to its previous year. However, gross margins have gone down from 55.4% to 48.3%, meaning less of that revenue will turn out as profit.

Dividing the $409.3m in revenue by the 4.8m units sold we get an average price of $83.87 and a gross profit of $40.5 per unit sold, so that's a number to look at tomorrow.

Another interesting note is that only 66% of its sales comes from the US, which means they could have currency headwinds to look at as well. But look at those growth numbers:

  • U.S. revenue grew 130% year over year, APAC 314%, EMEA 282%, and Other Americas 286%
  • Q315 cash from operations increased 37x to $121.3 million compared to Q314

Now look at the company's future outlook, as it has gotten a lot of pressure from competition and mistrust from the stock market.

Fitbit's outlook for the fourth quarter of 2015

The company's outlook for the fourth quarter of 2015 is as follows:

  • Revenue in the range of $620-650 million
  • Non-GAAP gross margin in the range of 48.0-49.0%
  • Adjusted EBITDA in the range of $80-100 million
  • Non-GAAP diluted net income per share in the range of $0.20-0.25

Starting to just look at the quarterly results, we see there is a good chance that Fitbit's margins are actually higher for Q4 compared to Q3, which is a good sign. Interesting to note is that the low end of its EBITDA guidance means the company would generate less cash than in the quarter before, which is highly unlikely. Given a similar revenue per unit sold, we should see 7.4m-7.75m units sold, which is an increase of 61%. Looking at the quarterly search volume index, we find the average index to be 46% higher in Q4 than Q3, which is a positive sign.

Another way to see how many units were sold is to look at the number of app installs and reviews.

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Rank history shows a clear trend upward. Fitbit's app even hit the 1# spot for the most downloaded app during Christmas day.
Fitbit reviews Q4 2015

Reviews are interesting, as one has real numbers on them, which means if the same percentage of people reviewed the app, we can roughly outline the increase in downloads from this graph. So, by looking at that, we get a total of about 4k reviews in Q3 and 6.8k reviews in Q4, which is an increase of 70%. If this guideline is correct, we should see Fitbit reporting about 8.16 million units sold and roughly $684 million in revenues.

The company's outlook for the full year 2015 is as follows:

  • Revenue in the range of $1.77-1.80 billion
  • Non-GAAP gross margin in the range of 48.0-48.5%
  • Adjusted EBITDA in the range of $345-365 million
  • Non-GAAP diluted net income per share in the range of $0.92-0.96

Here is where things get complicated. Revenues of $1.8 billion would mean a yearly increase of 141%, but if you look at revenue per share, you only get a 91% increase, as the number of outstanding shares has grown by 25% from 204m to 255m. However, the key number is the Earnings Per Share (EPS), as the street is now looking for profitable companies.

Fitbit's EPS would land at $1.00 if they sell 8.16 units.

Fitbit's Future in 2016

Wall Street is expecting a profit of 25 cents per share on revenue of $647.55 million, though management's answer for competition and guidance will likely steal the show.

Apple (NASDAQ:AAPL) is one of the main challenges facing Fitbit's management on Monday. Here is an interesting post about the threat, and there are threats from Under Armour (NYSE:UA) as well.

Yes, I agree that there will be growing competition, but one thing Wall Street always does wrong is to overemphasize the domestic market and tend to ignore the other 6 billion people on this planet. (Just look at Netflix's (NASDAQ:NFLX) report 1 year ago.) Under Armour only has 11% of its total sales internationally, and it's not a big international brand name. Meanwhile, Fitbit sells 34% of its products internationally and is growing this number each day. In my opinion, Apple is the only true competitor to Fitbit, and currently, they are playing in two different leagues - which leads me to believe that Fitbit will continue its growth story for 2016.

Trading on Fitbit Earnings

So, where can the stock go on Monday after earnings?

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A solid guidance for 2016 would send this stock to $19.87 and a poor guidance will make it test new lows around $13, as this market has become like the Roman empire, where stocks are now fighting for their valuation like gladiators and earnings calls are performed in the Colosseum, with the hedge funds performing the Thumbs Signal in form of longs and shorts.