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It hasn’t been a great year for CEO James Park and the rest of the Fitbit Inc (NYSE:FIT) shareholders who’ve seen FIT stock lose almost 18% of its value year to date through Aug. 31 on top of a 75% loss in 2016. Ouch. Ouch. Triple ouch!
It’s hard to believe Fitbit finished 2015 with a market cap of $4.9 billion, three-and-a-half times larger than it is today.
There’s no denying what can happen when a company bets on the wrong horse. In the case of Fitbit, it would be its hard press on fitness trackers when the consumer was calling for smart watches that incorporate fitness into the product.
Hindsight is 20/20, but that’s why CEOs get paid so much — to make the right calls. James Park didn’t, and it’s cost him a lot of money.
I’ve written about Fitbit for InvestorPlace four times this year. I thought I’d go back through those articles to find five kernels of knowledge I’ve gained about the company as we’ve rolled through 2017.
Right or wrong, they’ll determine how FIT stock does the rest of year and into 2018.
In early February I wondered if Garmin Ltd. (NASDAQ:GRMN) and Fitbit made a good long/short play because Garmin was wading into the smartwatch industry and Fitbit was losing market share.
At the end of September 2016, Fitbit had 23% market share. By the middle of 2017, according to International Data Corporation, it was down to 12.3%, behind both Apple Inc. (NASDAQ:AAPL) and Xiaomi at 14.6%.
So, in nine months, Fitbit lost almost half its market share. I guess that’s why its stock’s dropped by more than half, as well.
Also, in my story from early February, I worried about Fitbit’s comfy cash position disappearing — it sat at $672 million at the end of Q3 2016 — but it’s stayed remarkably consistent — it was $675.8 million at the end of June — thanks to significantly cutting its accounts payable outstanding.
While this can’t go on forever, it’s a sign the company is at least trying to cut its costs and keep the coffers flush. On the downside, the revenue reduction year over year means it’s got to do a lot more if it ever wants to make money again.
While revenues in the second quarter were down by 39.8% from a year earlier, operating expenses declined by just 9.6%, and R&D went up.
There Are Better Alternatives
The one thing I always consider when analyzing a stock is whether there are better alternatives available. Stocks that are making money and don’t carry the same level of risk.
In my article in late February I suggested to readers that Apple would make a better buy than FIT stock; since then, Fitbit stock has been flat while AAPL stock is up 21.0% through August 31.
Sometimes you can have your cake and eat it too.
In April, I did bend a little bit on my opinion of Fitbit, suggesting it made a good buy around $5.40 where it was trading.
“If you’re a speculator, FIT stock is the ideal play at these prices. If you’re a buy-and-hold investor, I believe there’s too much risk associated with owning Fitbit,” I wrote April 17 discussing $5 stocks. “You’re better to own Aegon N.V. (ADR) (NYSE:AEG) if you’re a more conservative investor and if you’re like me and believe in the future for Latin American stocks, Companhia Siderurgica Nacional (ADR) (NYSE:SID) also makes sense, but only as a non-core and tiny piece of your investment portfolio.”
In the four months since FIT, AEG, and SID are up 9.6%, 23.1%, and 14.8% respectively, compared to 6.0% for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) in the same period.
Clearly, investors felt all three of these stocks had bottomed in price.
Chance of a Buyout
I realize the financial media have beaten this subject to death, but that doesn’t make it any less real.
In May, I argued that FIT stock is worth the risk because its balance sheet is still strong, something I referenced earlier, and someone will buy it, more likely a private-equity firm than Garmin or another competitor.
Private-equity firms look for one of two things in any acquisition.
First, they look for businesses that they can grow through bolt-on purchases that strengthen the entire operation while allowing for additional organic growth. It’s the multiplier factor if you will.
Secondly, they look for businesses whose cost structure is out of whack and quickly reduced to better reflect a company’s overall revenue. That’s Fitbit to a tee. Its R&D is still way out of line with reasonable growth expectations in the next 12-24 months.
It wouldn’t surprise me if a private equity firm swooped in later this year or early in 2018 and offered to buy Fitbit for $9 a share, which works out to three times its enterprise value.
The big question is whether majority owner and CEO James Park would sell.
Bottom Line on FIT Stock
Unless Fitbit reverses course — it had surprisingly good Q2 2017 numbers — I don’t see its stock retreating from where it currently trades around $6.
What I’ve learned about Fitbit in 2017 is that it’s remarkably resilient; aggressive investors should benefit in the next 6-12 months either through a higher stock price or a buyout.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.