Fitbit (FIT, Financial) has fallen over 85% from its all-time highs. Despite the massive drop, investors who are thinking of catching the falling knife should reconsider their positions. More often than not, a strong decline in stock price has a justifiable reason, which is what makes bottom fishing a very risky investment style. While timing the bottom with perfection or near-perfection can result in great profits, investors should be very cautious.
In the case of Fitbit, the company’s decline has been facilitated by declining margins and an increasing threat of irrelevancy in the long run. Like GoPro (GPRO, Financial), Fitbit’s products are likely a fad, and many companies have tried to benefit from this fad by entering the space all guns blazing. With the likes of Apple (AAPL, Financial) and Samsung (XKRX:005930, Financial) competing against Fitbit, the company is consistently under the threat of becoming irrelevant over the long run.
The increasing competition is evident by Fitbit’s declining margins, which shrunk from over 48% in 2015 to 39% in 2016. Moving forward, Fitbit expects sales of $1.5 billion to $1.7 billion in the next fiscal year, down as much as 30% on a year-over-year basis, further cementing the thesis that the company’s products are indeed a fad.
The company is even trying to pump up its sales numbers with the help of acquisitions as it recently acquired two Smartwatch startups costing a total of $38 million. While the acquisitions look cheap, the most it can do is act as a short-term fix for boosting sales. In the long term, the threat of irrelevancy will always be looming over Fitbit.
To make matters worse, Fitbit’s latest products are lacking any true innovations. The company’s latest device, Alta HR, lacks any stunning new innovations that would make it a must-have for smartwatch owners or force new buyers into the market. All things considered, investors should not consider catching this falling knife right now.
Conclusion
I expect Fitbit to head lower consistently to the point where the company gets acquired on the cheap or goes private. In both scenarios, investors don’t have any incentive to buy the stock at current levels. With margins already heading lower, and sales expected to fall in double digits this year, Fitbit is definitely not a turnaround candidate. As a result, bottom fishing with Fitbit can prove to be disastrous for investors.
Disclosure: I do not hold a position in the stock mentioned in this article.
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