As my readers know, I have been bearish on Fitbit (FIT, Financial) since the stock was trading at almost $35. I even recommended shorting the stock multiple times in the past few months. While Fitbit has lost considerable value since my bearish call, the stock has more downside to offer.
Decelerating growth
Fitbit lovers repeatedly speak of a huge prospect in the health and fitness market. However, it is essential to keep in mind that the company's prevailing attention is only on casual fitness. The size and long-term potential of this particular market is a noticeable question for investors.
The company’s sales estimates for this year indicate that the target market might not be as immense as Fitbit’s bulls hoped. Fitbit recently launched its two new products – Alta and Blaze. In spite of growing from a small revenue and launching its two new products, the company predicts a huge drop in top-line growth, approaching just 32% this year from 149% in 2015.
Fitbit products need physical effort, discipline and dedication to endure consistent activity. This task seems difficult and is the reason why the majority of clients stopped using the company’s product.
The only way for the company to gain its growth back is to launch more specialized devices and to focus on other aspects of the wearables market. However, the company still has no such plans, and the market's emphasis remains on the decelerating growth.
Other risks
Bulls who have faith that the company’s stock is recovering need not hurry into buying just yet. Fitbit performed well in its most recent quarter, and the reason behind that short-term performance was its seasonal strength.
Holiday sales helped the company grow top line by 92% in the recent quarter. Gross profit margin escalated to 48.8%, a surge of 2.9% from 45.9% year over year. However, expenditures grew at a more rapid rate, up 139% year over year. These expenses will continue to move higher until the brand recognition fortifies.
Apart from this, Fitbit runs the risk of not overtaking expenses with improved sales. In its most recent quarter, day sales outstanding increased from 48 days to 56 days compared to the same duration in 2014. Recently, the company shared its guidance for 2016; it projects around $2.5 million in top line and sustained gross margins.
Conclusion
Although Fitbit’s strong growth looks impressive, the high expenses offset much of those gains. The company’s growth is slowing down drastically and given its lack of growth drivers going forward, Fitbit has no upside to offer.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
