Don't be Fooled by Fitbit's Downfall, It's Still Overvalued

It has been roughly a month since I recommended investors to short Fitbit (FIT). My recommendation has largely outperformed the market as the stock has already lost almost 40% of its value. Despite the 40% dip, I think the stock is still overvalued and has a lot of room to fall. However, I don't think it is still a great short, but I would still recommend investors to stay away from it. Investors who have enjoyed 35% profit can close their short positions and should book profits.

Moto 360 Sport trend, a threat to Fitbit

Fitibit’s shares were down 12%, when it unveiled its latest gadget—The Blaze smartwatch.
Blaze is not Fitbit’s first smartwatch, but it does highlight that Fitbit is quite serious about maintaining its strong market share growth. This tactical shift has already turned into significant surges in average selling prices, and the market for smart watches is expected to grow further at a rapid pace.

However, the reason why I called Fitbit a short was because of the increasing competition in the segment. The company’s Blaze smartwatch wasn’t received well by investors as it was priced a lot lower than Apple Watch. Fitbit is hoping that sacrificing profit margin will help it sustain its market share growth, however this strategy will hurt Fitbit in the long run as the competition is increasing rapidly.

The rivalry is poised to heat up this month, as Motorola is about to launch its new smartwatch—Moto 360 sport—based on second-generation Moto 360. The Moto 360 sport is an upgraded and more resilient version of Moto 360 with some additional features. It is mainly designed for athletes. The watch looks less attractive due to its non- removable silicon band, but accounts for both dust as well as water resistant. Its display is more visible in sunlight, and it comprises built-in GPS facility.

Throughout the first three quarters of 2015, Motorola was left out of the list of top five companies that sold the most wearables. On the other hand, Fitbit lingers to rule the market, as it sold more wearables than any other company during the first three quarters. Apart from this, Fitbit’s fitness products are relatively cheaper than most Android Wear watches and perform well irrespective of smartphone platform.

However, the Moto Sport 360 should still be considered a threat to Fitbit’s business, not by itself, but for the trend it symbolises. As the Android Wear market is less than two years old, the devices will carry on to grow and chase different niches, Fitbit could face additional challenges in the approaching quarters. Increasing competition will compress margins and this will hurt Fitbit’s ability to deliver strong earnings growth going forward. Hence, I think Fitbit still has more downside potential.
Published on Jan 15, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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