Fitbit is Still Overvalued, but Can You Short It?

A few months ago, I penned down an article highlighting the reasons why I thought Fitbit (FIT) is overvalued and a compelling short. I compared Fitbit to GoPro (GPRO) and predicted that the stock will follow witness a similar crash as GoPro. Since then, both GoPro and Fitbit have fallen considerably.

GoPro’s rise fall has been more dramatic than Fitbit’s. However, after an approximate 90% drop from its all-time, GoPro’s shares may be nearing a bottom. That said, I think Fitbit has more room to fall, and investors should still stay away from the stock or short it.

Since I wrote the article, Fitbit has lost over 55% of its value.
However, the stock is still overvalued and a worthy short since its market cap is still twice as much as GoPro’s. The reason why I compare Fitbit with GoPro is that both the stocks have been overpriced for a long period of time due to the hype surrounding their respective industries. Investors have had unrealistic expectations of growth from both Fitbit and GoPro and it was only a moment of time before reality struck.

Fitbit has a strong position in the wearables market, which, according to many studies, is expected to grow considerably over the next few years. As a result, investors have priced in years of growth into Fitbit’s share price.

However, the outlook for the wearables market is unrealistic and given the increasing competition, I don’t think Fitbit will be able to grow enough to justify its current valuation. Despite the drop, Fitbit is trading at 33x trailing earnings and has a market cap of almost $2.9 billion. By comparison, GoPro has a trailing P/E ratio of 41 and has a market cap of $1.42 billion.

Given the high valuations, I think both the stocks have more downside to offer. But, I find Fitbit’s overvaluation appalling and wouldn’t be surprised to see the stock drop another 10%-15% in the near future.

In addition, amid the current bearish market sentiment, investors should stay away from momentum stocks and hyped companies. An impending bear market will likely be harsher on stocks like Fitbit, which is why I think investors can still consider shorting the stock.

Conclusion

Despite Fitbit’s recent plunge, I think the stock is still overvalued and has a lot of downside to offer. Given Fitbit’s hyped business model, overvaluation, increasing competition and bearish market sentiment, I think investors can still consider shorting the stock. Investors who don’t like shorting should stay away from Fitbit.
Published on Feb 16, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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