Fitbit Shares Fall As Apple Watch OS3 Makes Noise

| About: Fitbit, Inc. (FIT)

Summary

Shares of FIT continue to underperform analysts' PT expectations.

Positive analysts' notes have been met with share price depreciation.

Apple Watch OS3 will likely not impede the market share status of Fitbit products.

Be it Wedbush's recent upgrade or positive reiterations from Citigroup (NYSE:C), shares of Fitbit (NYSE:FIT) continue to underperform expectations. While I have four positive trades on Fitbit year-to-date, this last trade is taking longer than I expected to drive returns on my capital. Nonetheless I will remain patient and continue to understand that while shares of FIT will not exude a traditional growth multiple akin to those found in hi-tech, bio-tech or even social media, they will still yet appreciate beyond my cost average of $13.72 a share. And that cost average came on the heels of this latest downturn in shares of FIT that found the stock down some 6% intraday yesterday and on higher than usual volume.

So why all the selling in shares of FIT recently, even as some rather positive notes have been forthcoming from analysts? In short, Fitbit is a hardware company aiming to saturate the world with Fitbit fitness trackers and beyond that the company has little in its quiver to address what is less than favorable, long-term sell-through trends in what is a one-product issuance company.

While the sell-through rate remains positive presently, it mirrors the total net sales growth deceleration of the company, which analysts now see growing close to 39% for the year. That is up since the first quarter by an average of 3% give or take. The latest notes from Dougherty & Co. analyst Charles Anderson suggests results of decelerating growth albeit still growth:

Dougherty & Co analyst, Charles Anderson, published a note on Fitbit sell-through indicators (Google Searches, App Downloads). The search and app download trends over the past two weeks for Fitbit products continued to be at lower levels than the product cycle-induced run rate he documented from February to April. Google searches for the Fitbit brand last week were up 29% YOY globally; up 18% YOY in the U.S.; and up 84% YOY in the U.K. The Fitbit app moved up the charts 17% YOY on iPhones in the U.S. and 30% YOY on Android smartphones in the U.S. last week.

So what's so bad about the current growth rate? I mean there are companies that would kill for Fitbit's growth rate. Well the issue is plain to see that last year, the company grew revenues above 90%, so even at 39%, the trend does not seem favorable or to have considerable runway beyond 2016.

Shares of FIT plunged after the company released Q1 results that beat analysts' estimates, but the guidance came in light of expectations for Q2 earnings. Having said that, the company boosted the high end of its FY16 earnings expectations. But nobody cares about what earnings are forecasted to be, come Q3 and Q4, when the disappointment for Q2 is at-hand and bears contention. Additionally, it appears that the plunge to $12.96 a share on May 6th desires a gap-fill response from shareholders. We'll have to see if that level holds because if it doesn't… look out below folks! With that said let's take a look at what Citigroup had to offer regarding Fitbit on Monday:

Citi calls Fitbit 'relatively inexpensive' wearables play after hosting Fitbit management at his firm's SMID Cap Conference on June 10, Citi analyst Stanley Kovler continues to believe Fitbit offers a "relatively inexpensive way to play the growing wearables market." Near-term, Fitbit is focused on filling out its U.S. and international retail channels with new products and higher stock levels of new products, Kovler tells investors in a research note. The analyst expects the company to drain inventory of older products in the channel heading into early Q3. He reiterates a Buy rating on Fitbit with a $30 price target.

Most analysts have a positive near to mid-term view on Fitbit and shares of FIT. But it must be placed into the right context for investors. Some analysts have multiples assigned to shares of FIT that are rather lofty for a hardware-in a stock's lifecycle where anything can happen. This is why it is best to trade a company like FIT rather than invest for the long term. I say this with respect to the company needing to diversify its product line beyond its existence today of fitness trackers.

In the Citi analyst note, Koyler articulates that Fitbit is focused on filling its retail channels, otherwise known as saturating the market. Fitbit likely has another 12 months before it fully saturates its key markets, mainly North America and Europe. Asia-Pacific isn't big enough to offset any post market saturation declines that might come once N. America is saturated. This is the context that investors should consider more broadly, but isn't offered in the analyst notes.

As it pertains to the Asia-Pacific, I'm of the opinion that Xiaomi's (Private:XI) low-priced fitness trackers that currently dominate the region, will continue to impede the progress of other brands including that of Fitbit. Even as fitness trackers become popular in India over the last 12 months, Fitbit is ranked number three in terms of market share in India, behind GOQii at 18% and Xiaomi leading with 27% market share. This is not to say that Fitbit can't grow sales in India or the broader Asia-Pacific region, but rather to better appreciate the ceiling for sales is significantly lower than Fitbit has achieved in first-mover markets like N. America and Europe.

While there has been recognizable positive analyst notes, sentiment and price targets assigned to FIT shares, some are of the opinion that the latest Apple Watch news might have had an impact on FIT shares. Apple (NASDAQ:AAPL) launched improvements to its Apple Watch operating system called OS3, which will feature a fitness app that rivals Fitbit's fitness apps. There will be a watch face made up of Apple's colorful activity-tracking rings, and another that offers a shortcut to the Workout app. People can share their activity data with other Watch wearers, so there's finally a social component. And the Watch will soon track activity levels for wheelchair users. Here is what The Verge had to say about the Apple Watch OS3.

Apple's new Watch software, watchOS 3, isn't just new software, it's an admission that Apple had it all wrong when it came to interactions on the first-generation Apple Watch. It's less of a revamp and more of a rescue of the Watch, an attempt to deconstruct the old software and to focus on the stuff that people actually care about.

It's still not a perfect smartwatch - if such a thing exists - but the demo of watchOS 3 offers a better explanation for why you might want to use an Apple Watch. It's not just a third draft; it's a total rewrite, and something insightful might finally emerge.

Unfortunately, even though the fall release of the Apple Watch iteration will also employ Wi-Fi capabilities that allow the user to untether from the iPhone for using the device, the owner still has to own an iPhone to operate the AWOS3. The owner will also have to add another line and a separate data plan. Additionally, the AWOS3 will still only be compatible with the Apple operating system; something other devices have greater flexibility with than Apple. But none of this really matters, as the AWOS3 is still not an optimal smart device and priced too high to achieve market share akin to its iPhone companions or compete "apples to apples" with Fitbit.

As The Verge all but concludes I have confidently concluded many months ago, "The Apple Watch was and is a poorly conceived product development that Apple will have to pour more money into." Even as a smartphone companion, the AWOS3 has no viable purpose beyond the smartphone. Everything on the AWOS3 that forces the price point beyond its competing smartwatches is available on the smartphone.

Even more unfortunate is that the AWOS3 lacks some of the key functions that make the smartphone such a daily part of our lives… photography and gaming. You really can't perform either of those applications within reason on the AWOS3. Gaming apps are the leading app downloads on smart devices. Fitbit realized that form and function have to be optimal for a smart device and as such decided long ago not to travel down this unnecessary road of nonsensical smartwatch applications. It's why the Fitbit Blaze is more of a smart fitness watch at $199 than was an errand Apple Watch at $349 and reduced in price to $299.

The next version of the Apple Watch will be just that, the next version. It will likely perform better than the previous version in terms of sell-in, but sell-through will be equally as poor as the first Apple Watch. I alerted investors and followers of the Apple Watch product development in my March 1st publication titled "Apple's Watch Presents Less Potential Than Investors Think." The article had over 230 comments, some of which were deleted due to direct attacks on my person, and was the first contrarian perspective on the potential of the Apple Watch.

My advanced data and analytics "red flagged" several issues with the Apple Watch that are inherent to most smartwatches of equality. Unfortunately, for Apple Inc., the performance of the Apple Watch has borne out my analytics. In short, if FIT shareholders are worried about the next iteration of the Apple Watch, good! It's good and relevant to have a healthy fear and/or understanding of the total wearables marketplace that Fitbit participates within.

However, I think near-term fears that may have induced some selling pressure on shares of FIT will be a long-term profitable opportunity for shareholders buying into that downturn. Then again, I expected a 10% rally from the $14.60 level… perspective and big picture.

When I'm wrong I'm wrong, and fortunately, it happens less often than when I'm proven accurate in my trading activities. As it pertains to shares of FIT, with 4 profitable trades in hand YTD and maintaining my current position, which has recently grown in size, I remain confident that shares of FIT will appreciate near term.

I truly desired for shares of FIT to close below $13 on June 14th as this would have likely sparked a "flush" in selling pressure the following morning. But unfortunately, that opportunity to buy shares at a potentially lower price didn't come to pass. Shares are seemingly rebounding intraday by 2.7% and ahead of an all-important FED announcement Wednesday morning.

Longer term, Fitbit needs to broaden its scope of products in order to achieve a greater level of profits and expand its share price multiple. Lastly, Fitbit executives have to create their own operating playbook in order to inspire shareholders who might better understand the typical hardware-centric company growth cycle and which I will dive a little deeper into with my next publication.

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.