Fitbit's (FIT, Financial) share price peaked within one month after its initial public offering (IPO). After reaching its all-time high, the stock continues to tumble and has lost more than 85% of its value. Currently, the stock is down nearly 27% year to date and looks like it still has more downside to offer.
Although the company managed to beat analysts' estimate on both the bottom line and top line in the most recent quarter, its revenue growth has slowed considerably. In the first quarter, the company reported revenue of $298.94 million, representing a drop of almost 41% year over year.
Moreover, the company’s gross margin declined over six percentage points on an annual basis. It also delivered a net loss of $34.4 million mainly due to weaker-than-expected sales. The company’s downward trend has been driven by a gloomy Christmas season last year as well as a weak outlook for 2017.
Fitbit’s revenue growth turned red in the fourth quarter of the previous fiscal, and it looks like the situation will not change anytime soon as the company recently reported it is in a transition year. The company is trying hard to expand into the higher-end smart watch category.
The company already introduced smart fitness watches comprising the Surge and the Blaze. Those devices, though, failed to compete against expensive rich-featured watches offered by Garmin (GRMN, Financial) and Apple (AAPL, Financial). There are rumors that the company is working on improving its smartwatch and will release a newly enhanced smartwatch later this year.
Another significant problem with Fitbit products is the lack of apps. When Apple introduced Apple Watch, customers suddenly turned their attention toward full-featured wearable apps. To counter, Fitbit updated its software to auto-detect workouts, but that feature was quickly integrated by Garmin into its products.
Garmin also launched its own app store named “Connect IQ.” Fitbit recently said that it would launch its own app store later this year, and that might be the reason why it acquired Pebble’s assets and intellectual property for $23 million.
Apart from this, Adidas (ADS, Financial) is also on its way to launching its new Chameleon HR fitness tracker later this year. Chameleon HR fitness tracker will likely comprise a heart rate sensor and a LED matrix-style display. Along with the Chameleon, Adidas will also release new app “All Day” which will offer numerous tips and routines, labeled Discoveries, as well as music.
Adidas also plans to terminate its own miCoach ecosystem and merge it with Runtastic, which it acquired in 2015. These moves suggest that Adidas is getting prepared to make some solid moves to capitalize on the rapidly growing digital fitness market.
To compete efficiently against mammoth rivals like Apple, the company needs to invest heavily in research and development as well as marketing for new products. That is a difficult situation to look after when your revenues are falling. Although Fitbit has a strong balance sheet, it will still have to compete against well-established companies, suggesting it will face a lot of bumps in the coming years.
Summing up
Fitbit has been a miserable stock to own. The company’s share price has dropped significantly, and the reasons for the decline are rapidly slowing sales growth and tumbling margins as well as a lack of moat contrary to low-priced fitness trackers and rich-featured smartwatches.
Even if the company starts spending heavily in research and development, its free cash flow will indeed turn negative. Moreover, the company is not profitable yet which appears to be a big problem. The competition in the digital fitness industry will continue growing with each passing year, and the robust financial base that Fitbit had relished will continue to deteriorate.
I strongly recommend shareholders stay away from Fitbit. Its future looks bleak.
Disclosure: No position in the stocks mentioned in this article.
