Shares of Fitbit (FIT, Financial) have fallen off a cliff over the last few months. I called Fitbit a short toward the end of 2015; since then, Fitbit has lost over 50% of its value. After the drop, Fitbit is now trading at 21x trailing earnings while it has a forward P/E of just over 10.
Given that Fitbit is present in a rapidly growing market, investors may think that the stock is undervalued and has great potential. However, Fitbit is still a terrible investment. While the stock may not be a short anymore, it definitely is a sell.
No moat
The primary reason I don’t like Fitbit is because the company has no moat. Just like GoPro, Fitbit has risen to fame because of a fad. Although Fitbit is present in a growing industry, it will be very difficult for the company to defend its market share against tougher peers.
The likes of Apple (AAPL, Financial), Xiaomi and Garmin (GRMN, Financial), who have a proven track record and produce better products than Fitbit, can easily snatch its market share. In addition, the competition is growing consistently as even Under Armour (UA, Financial) announced that it has started producing a similar product at cheaper price points.
All in all, I don’t see any reason why Fitbit will continue to be the market leader, which is why I recommend avoiding the stock despite its seemingly cheap valuation.
Small target market
While the wearables market is expected to grow aggressively to over $30 billion in the next few years, Fitbit’s products only target a small portion of that market. Fitbit’s watches only target a small group of customers who would be swayed by the fad and buy the fitness products. Given the small size of the market as compared to the growing competition, Fitbit will fail to justify its valuation.
Conclusion
Despite Fitbit’s 50% drop over the last few months, I am still not convinced that the stock is anywhere near cheap. Fitbit is still overvalued and will continue crashing once the fad starts to die. Although fundamentals aren’t seemingly rich, investors are not pricing in the threats from large competitors and the fact that Fitbit’s business has no moat.
I expect Fitbit to lose its market share in the foreseeable future, which is why I would recommend against buying the stock. While shorting Fitbit may not represent a lot of value, the stock is a definite sell.
Disclosure: The author doesn’t have any position in the stocks mentioned in the article.
