Fitbit's Downfall Has Started and It Will Get Worse

Shares of Fitbit (FIT) are down over 55% since I recommended shorting the stock just over two months ago. In another recent article, I cited Fitbit’s overvaluation as another reason to short the stock, and shares of Fitbit have fallen over 10% in the reference period.

Fitbit’s recent downfall can be blamed on the company’s weak guidance. Earlier this week, Fitbit released its Q4 earnings report, and although the company managed to beat the Street estimates, shares tanked over 17% on account of Fitbit’s weak guidance.

Fitbit’s EPS for the quarter came in at $0.35, comfortably beating the analysts’ estimate of $0.25.
On the other hand, Fitbit’s top-line also jumped 92% year over year to almost $712 million, beating the analysts’ estimates by roughly $64 million. Despite the strong results, shares of the company tanked in after-hours trading due to its worse-than-expected guidance.

Fitbit anticipates Q1 sales of $420 million to $440 million, a lot lower than the analysts’ estimate of $484 million. On the earnings front, Fitbit expects Q1 EPS to come in at $0 to $0.02, much lower than the analysts’ expectation of $0.23.

Fitbit’s earnings are expected to take a hit due to the company’s added expenses related to the launch of new devices. Although Fitbit’s full year guidance remains the same, the increasing expenditure further proves my point that Fitbit’s business model is a fad.

Although Fitbit is witnessing strong sales, I think its growth will stall soon as the company’s business model is based on a fad. Soon enough, Fitbit’s sales will saturate as the fad doesn’t appeal to a wide range of customers. Moreover, the growing competition from several award-winning international rivals also poses a threat to Fitbit’s future.

So, while Fitbit can increase expenditure on advertising and promotion, the company’s long term future looks dim as fad-based business usually end up as failures. Hence, for the reasons mentioned above, I think investors can still short Fitbit as I think the fair value for stock is at under $10.

Conclusion

Despite Fitbit’s strong growth, I think investors should be cautious about the company’s future. Given the fad-based business model, I am sure that Fitbit’s sales growth will come to a halt a lot sooner than many people expect. And when that happens, shares of Fitbit will tumble. I believe, despite the recent tumble, Fitbit still has at least 30% more downside potential, which is why I think the stock is a short.
Published on Feb 25, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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