Fitbit: Are Signs Finally Pointing Up?

| About: Fitbit, Inc. (FIT)

Summary

Fitbit easily smashed Q4 estimates due to a strong holiday season.

The weak Q1 guidance is a mixed blessing by adding to worries over the fad nature of the business and providing a lower entry point.

The valuation in the stock is finally compelling with the market no longer having any expectations from the company.

Despite the strong holiday sales, Fitbit (NYSE:FIT) trades near post-IPO lows due to the self-inflicted wounds and market fears highlighted in my previous research. Unfortunately, for investors, the company has a long way to go to prove that the fitness tracking business isn't a fad and Under Armour (NYSE:UA) isn't a competitive problem.

Based on the Q1 guidance, the stock is trading back down to $14 in after-hours. With a market cap of $3.5 billion, one has to wonder if the stock doesn't offer some value finally. My original problems with the stock partly centered on the stretched valuation.

Fitbit easily smashed Q4 numbers that wasn't a huge surprise considering the details already floating around regarding app downloads for the holidays. The market though isn't happy with disappointing Q1 guidance while reaffirming full-year results.

The biggest concern is that these forecasts smack the issues facing GoPro's (NASDAQ:GPRO) investors to start 2015. The action camera maker started the year off with weak margins guidance and ended up with huge revenue disappointments. Outdated products and competitive threats are the prime reasons for lower margins.

The valuation story is completely different with Fitbit at this point in the story. The company is forecasting lower Q1 margins due to its intention to make a global launch of the new Blaze and Alta products. FIT even claims that pre-order volumes exceeded expectations, but the revenue issue comes into play on the reorder volumes likely pushing into Q2 revenues. The move helps full-year revenues, but it hurts Q1 numbers.

The global launch is an interesting concept considering the growth so far is completely contained by the U.S. sales. For Q4, the U.S. accounted for over $500 million in revenues while not one other region hit $100 million. The full-year revenues were 74% domestic.

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Source: Fitbit Q4'15 earnings release

The ability to expand internationally and reach a 50% split is a huge potential catalyst. An additional $400 million in revenues from outside the U.S. to the Q4 levels adds huge upside. Failure though will hit margins hard due to the added expenses for sales and marketing.

The positives are the signs that Fitbit isn't falling into a fad, at least not yet. The amount of active users is up 152% to 16.9 million at the end of 2015. The registered user total hit 29.0 million, up from 11.0 million last year. The company sold 32.3 million devices over the last two years. Clearly, the conversion rate to active users is slightly below 50% of new devices sold, but the key trend is the amount of active users is expanding at a rapid pace.

The key takeaway is that Fitbit provided generally strong results and guidance outside of an initial hit to Q1 numbers. The company has the customer engagement and retention that make the stock interesting trading at roughly 12x the midpoint of 2016 EPS guidance of around $1.14. The risks are far from gone, but the rewards are more balanced now.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FIT over 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.