When legends like Steven Cohen, George Soros (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), all buy into a stock during the most recent quarter, it is worth taking note. Fitbit (FIT, Financial) offers a great long-term growth opportunity at this price.
The wellness craze continues and Fitbit is at the center of it. The company provides fitness tracking devices (wearables) and a community (social) network platform for people to reach their fitness goals.
The question is: is the company just a one-off fad or a product and community that will be a long term brand? Apple Watch (AAPL, Financial) has cut into Fitbit’s share of the market, but that does not diminish the potential of the brand.
The company will report earnings tomorrow, which will indicate how it is handling the intensified competition, but I think FIT could actually be a good trade. No doubt, this year’s earnings will be impacted negatively, but should still remain positive.
Fitbit has seen explosive growth in the last five years, going from losing $4 million on $76 million in sales to earning $176 million on $1.8 billion in sales. The company has over $790 million in cash and no debt. It generated $114 million after taxes last year and could see that rise up to $330 million by the end of 2017. This is not just a play on wearables, it is a trade on the internet of things (IoT) and Fitbit has built a very good community of users within that sector.
Over the past five years, Fitbit has launched 11 different products with prices ranging from $50 to $250. This portfolio has the most breadth in the market, which gives the company the ability to gain customers across most segments at price points that are lower than Apple’s base price for its watch. This is a competitive advantage, for now.
What has happened is the market has extremely undervalued the stock, discarding the strong future earnings potential in the company. And, although the industry is still new, Fitbit is at the forefront of where it is going with enough cash to build upon and a low enough price point to create value for shareholders.
New products like the Alta and Blaze are off to a strong start and the company has stepped up its efforts to continue building the brand. This includes making accessories more fashion friendly and pumping more money into marketing. If you’ve seen a Fitbit advertisement, it is fantastic.
If the analysts are right and the company earns $1.40 a share in 2017, the stock could easily double in price. Especially if the company can continue to penetrate the Asian/Pacific region. China alone could have FIT’s earnings see $2.50 by 2020. That is north of 20% yield on today’s price.
The reason is because Fitbit does not rely on a watch and does not compete in that market. Sure, it tells time, but it’s more of a great accessory and used by athletes to track data. This provides enough distinction from the Apple Watch to make it relevant.
The bottom line here is that worldwide, people can afford the Fitbit more easily than any other wearable and that is a huge advantage going forward that Apple will not catch up on anytime soon. As a side note, here in D.C. there are a lot of corporate wellness programs and quarterly contests and guess who the vendor of choice is… Fitbit.
Disclosure: I do not hold a position in FIT.
Start a free 7-day trial of Premium Membership to GuruFocus.
