As my subscribers know, I have been a Fitbit (FIT) bull for about two years now. Although the stock has not performed as I had expected, I remain very bullish and have used the negative sentiment in FIT to acquire shares at a significantly undervalued level. For full disclosure, FIT represents a significant portion of my portfolio and my average cost basis is around $4.80 per share.
Although FIT reported a great Q4, reporting revenue of $571.2 million (beating expectations by $1.85 million) and GAAP EPS of $0.06 per share (beating expectations by $0.08 per share), the stock sold off a bit and traded down from $6.87 and is currently sitting at just $5.92 per share. The driving force for the sell-off was FIT's relatively weak guidance, with management guiding for Q1 revenue of $250 million-$260 million and EPS of -$0.24-$0.22 (below the consensus estimate of -$0.15 per share).
Analog to Chegg
Despite the guidance being relatively tepid, I am floored by management's pivot of FIT's business model into a more reliable, recurring revenue-type business model, which reminds me of Chegg's (CHGG) pivot a few years ago. In 2014, when CHGG was trading at $7.30 per share, I outlined my thesis for investing in CHGG, given management's prudent pivot away from product sales and into higher-margin services sales. Here's a link to my article from August 2014 entitled "Chegg: Pivoting Toward Success."
In 2014, Chegg reached a partnership with Ingram, the world's largest book distributor, to mitigate Chegg's reliance on sales of textbooks and allow it to focus on building out its suite of services. Chegg then started a number of low-risk, high upside initiatives, such as Chegg Career Services, tutoring services, among others. These services had one-time fixed costs for the launch and then allowed for much higher margins, as revenue from each incremental user flowed straight down the
All of this information was originally published and discussed on my exclusive marketplace service, Invest with a Stacked Deck.
