Fitbit’s stock returns
Fitbit (FIT) shares have burnt significant investor wealth over the years. Fitbit was listed on the stock exchange in June 2015. The stock rose from $31.09 in June 2015 to $47.6 in July 2015. Since then, the stock has fallen. Fitbit stock has fallen 91.0% to its current price of $4.36 per share.
Fitbit shares have lost 66.0% in the last three years and 33.3% in the last year. The stock has fallen 12.3% since the beginning of 2019. Why aren’t Fitbit shares able to recover?
Revenue growth has stalled
Fitbit’s sales fell from $2.17 billion in 2016 to $1.51 billion in 2018. Analysts expect the company’s sales to reach $1.56 billion in 2019, $1.60 billion in 2020, and $1.605 billion in 2021. The growth isn’t attractive to investors. Fitbit’s revenue growth has been sluggish due to several players entering the wearables space.
Fitbit used to be the market leader in the wearables segment. At the beginning of 2014, Fitbit had a market share of 44.7%. Back then, the company was preparing for an IPO. Fitbit’s market share fell to 32.6% in the first quarter of 2015, 24.5% in the first quarter of 2016, 12.3% in the first quarter of 2017, and 14.8% in the first quarter of 2018, according to Statista.
In 2018, Fitbit’s shipments fell 10.0% when the industry growth was 27.5%. Apple, Xiaomi, and Huawei have entered the wearables market. Now, these companies are battling for supremacy.
During one of Fitbit’s earnings calls last year, the company stated that US markets have been saturated. The company will likely struggle to expand its revenues in the domestic market. Chinese companies entering the market hampered Fitbit’s growth prospects in international and emerging markets.
Fitbit is also struggling with profitability. The company is still posting a non-GAAP loss. While Fitbit’s bottom-line is improving, is it enough to generate investors’ interest? Fitbit’s EBITDA is estimated to rise from -$31.4 million in 2018 to -$10.1 million in 2019, $33.6 million in 2020, and $50.8 million in 2021.
Analysts expect Fitbit’s adjusted earnings to improve from -$0.20 in 2018 to -$0.15 in 2019 and -$0.06 in 2020. With an expected earnings growth of 60.0% annually in the next five years, Fitbit will likely post a non-GAAP profit in 2021.
What’s next for Fitbit?
Fitbit is still struggling to gain market share in the wearables space. The global wearable shipments in the first quarter rose 55.2% year-over-year to 49.6 million units. Fitbit managed to increase its device sales 36.0% in the first quarter. Fitbit sold 2.9 million devices in the first quarter.
Fitbit’s smartwatch segment drove its sales. The shipments rose 117.0% and accounted for 42.0% of the company’s total revenues. Fitbit’s sales grew 10.0% in the first quarter, which indicated that the company reduced its average selling price to attract customers.
Fitbit has continued to focus on new product launches to increase product demand. The products launched in the last 12 months accounted for 67% of Fitbit’s first-quarter sales. While tracker sales experienced device growth for the first time since the first quarter of 2016, is it encouraging enough?
Fitbit’s management has claimed that Inspire HR is the best-selling device in the US. Fitbit’s smartwatch portfolio has grown at a much faster rate compared to the industry growth. The smartwatch portfolio will help the company regain market share and will account for 50.0% of its total sales.
Fitbit’s health solutions segment is another growth driver. In the first quarter, the segment’s sales rose 70.0% to $30.5 million and accounted for under 10.0% of the sales. The health solutions business is a high margin business for Fitbit. The segment might be a key revenue driver going forward.
What’s the verdict?
Do Fitbit’s better-than-expected first-quarter results mean that the company is close to a turnaround? There are too many uncertainties for investors. We have seen Fitbit lose significant ground in the wearables segment over the years, which could happen in the smartwatch segment as well.
Although device sales have increased, the selling price has fallen and will impact Fitbit’s profit margins. The company will have to grow its revenues at a double-digit rate, improve the bottom-line, and gain market share to regain investors’ confidence. The stock remains an option with limited upside potential and significant downside risks.
The 15 analysts covering Fitbit have an average target price of $6.75 for Fitbit, which indicates that the stock is trading at a discount of 55.0% to the estimates.