On Friday, Business Insider reported that there has been an increase in short interest in Fitbit (FIT, Financial). The article indicated that short interest was already close to 50% of the total amount of shares on loan. Nonetheless, Fitbit shares closed flat, down 0.2% that day. Fitbit shares lost 62.52% of its value one year ago up until Friday, according to Morningstar data.
Albeit the company’s historical performance suggested there must be something terribly wrong on the company, betting against this short- or long-term bearish sentiment by going long on Fitbit shares should be fruitful if grounded on simple investment decision brought by deeper knowledge about the company.
Earnings performance
Fitbit will report its next quarterly earnings on Feb. 27. Meanwhile, the $1.7 billion tech gadget company delivered its third quarter fiscal 2016 results in November. For its recent nine months of operations, Fitbit had an amazing 39.2% sales growth to $1.6 billion and a rather disappointing 61% decline in its profits to $43.5 million.
(Operating expenses excluding cost of revenue, 10-K, and 10-Q)
Fitbit had rapid growth, about 48% to $876 million, in expenses associated with its cost of revenue. In addition, operational expenses rose 105% in the period to $646.5 million from $315 million in the prior year.
Despite the remarkable sales growth, the market punished Fitbit shares that day sending its stock price down by 33.6% on a heavy volume.
“I am pleased to see positive reception for our new products launched in the third quarter. We are attracting new customers while our existing ones are upgrading their devices, underscoring the strength of the Fitbit brand and growing relevancy of wearables as part of consumers’ everyday lives.”
“We continue to grow and are profitable, however not at the pace previously expected. We are focused on improving the utility of our products and integrating more deeply into the healthcare ecosystem and believe we can leverage our brand and community to unlock new avenues and adjacencies of growth.”
James Park, Fitbit co-founder and CEO.
Outlook
(Press release)
Fitbit sees its sales growing between $2.320 billion and $2.345 billion, or a 25.5% growth on mid-point value comparison. This compares to a 175% and 149% sales growth figures in fiscal 2014 and 2015, respectively.
Valuations
According to GuruFocus data, Fitbit had a trailing 12-month PE ratio of 16 times (industry median of 20), PB ratio of 1.5 times (industry median of 1.6) and PS ratio of 0.69 times (industry median of 1). The tech company does not provide dividends.
Fitbit
Fitbit was founded in 2007. Fitbit sells technology gadgets that are wearable for its customers. As of its annual filing, Fitbit has a family of eight wearable connected health and fitness trackers. According to Fitbit, these wrist-based and “clippable” devices automatically track users’ daily steps, calories burned, distance traveled, and active minutes and display real-time feedback to encourage them to become more active in their daily lives.
Fitbit’s platform allows its users to see trends and achievements, access motivational tools such as virtual badges and real-time progress notifications, and connect, support and compete with friends and family. Fitbit’s direct connection with its consumers provides personalized insights, premium services and information about new products.
Fitbit only has one reportable segment. In fiscal 2015, Fitbit derived 74.3% of its total sales from the U.S. Fitbit had grown its sales to $1.38 billion from the U.S. compared to $562.6 million in fiscal 2014 and $206 million in fiscal 2013. In addition, Fitbit had a three-year operating margin average of 12.2%.
Cash, debt and book value
As of Oct. 1 unaudited filings, Fitbit had $672 million in cash and marketable securities and no debt. The tech company also had 2.4% of its $1.7 billion assets in goodwill and intangibles for the period, while having a book value of $1.12 billion, compared to $784 million the year prior.
Cash flow
(10-Q)
Nine months into fiscal 2016, Fitbit had a 68% decline in its cash flow from operations. The decline followed after its weak profitability in the period, including marked increase in cash outflow related to company’s stock-based compensation and higher prepaid expenses and other assets.
Capital expenditures were $66.8 million, compared to $17.7 million the year prior, leaving Fitbit with negative 26.6 million in free cash flow.
Fitbit also allocates a good amount of its cash flow in purchases of marketable securities, in which the company defined as investments consisting primarily of bank deposits, money market funds, U.S. government and agency securities, commercial paper, and corporate notes and bonds, according to company filings. In fiscal 2015, the company allocated $552.8 million in marketable securities, while taking in $294.3 million in sales and maturities of the aforementioned securities.
For the period, Fitbit also issued shares and received $18.3 million in cash inflow as a result.
Conclusion
Fitbit's tremendous sales growth in recent years has slowed down. This does not mean the growth story has stopped, but rather has grown leisurely otherwise. In early December, Fitbit still leads and is expected to maintain this position in the wearables market, according to IDC. In particular, simplicity in the wearables device drives customer attention and market share.
(GuruFocus)
The one-year return and the increased short interest indicate that there is a lot more downfall expected in Fitbit shares.
In addition, the slowing sales growth supports the bearishness in Fitbit’s stock. The short interest in the company’s share has not only reached this height but has surpassed the 50%-mark during February and March when it reached 109.9% and 86%, respectively.
Fitbit’s cash flow appeared to be volatile as what can be expected of a growing company. In contrast, the company does seem to carry a solid-state of a balance sheet.
Among the nine downgrades Fitbit has received since November, Barclays, Deutsche Bank and Wedbush’s were notable. Share price targets were reduced from $24 a share to $10, $18 to $9, and $18 to $10, respectively.
At the $7.44 current share price, there seemed to be a good upside using these analysts targets, but then again targets can easily be revised overnight. Meanwhile, at price-book value of 1.49 times -- $1.66 billion market capitalization over $1.12 billion book value – the company seems to be a good risky bet right now compared to its peers if the 20% sales growth carries on for several more quarters.
In conclusion, Fitbit shares are a speculative buy with a target price of $10 a share.
Notes
- 10-K: Most of our (Fitbit) trackers also measure floors climbed, sleep duration and quality, and our more advanced products track heart rate and GPS-based information such as speed, distance, and exercise routes. Several of our devices also feature deeper integration with smartphones, such as the ability to receive call and text notifications and control music. In addition, we (Fitbit) offer a Wi-Fi.
- Connected scale that records weight, body fat, and BMI
- GuruFocus data.
Disclosure: I do not have shares in Fitbit.
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