Buying Fitbit Is a Huge Mistake

Shares of Fitbit (FIT) are soaring and being a bear, I don’t completely understand the rally. I have been bearish on Fitbit for a few months now and I have recommended investors to short the stock multiple times ever since it was trading near $35.

Fitbit has lost over 60% of its value since my first short call, however shares are gaining as of late due to bullish commentary from several analysts. Shares of Fitbit have rallied almost 20% since touching 52-week lows of $11.90. However, the recent rally will likely prove to be short lived and investors should use this opportunity to sell, if not short, the stock.

Analysts are wrong

Many analysts, notably Citron Research’s Andrew Left have claimed that the wearable industry is growing at a rapid pace and Fitbit, being the market leader, stands to benefit from it.
While I don’t doubt that the wearable industry is a fat growing segment and will be worth tens of billions of dollars in the future, I don’t think Fitbit can dominate the market.

I usually agree with Citron Research, however in case of Fitbit, I think Citron is wrong. As I have said time and time again, Fitbit’s business model is based on a fad that is no different than GoPro’s. Products of both the companies were extremely well received during the initial stage of the business. However, GoPro’s sales stalled in the later stages of its business, implying that it was based on a fad.

I see multiple similarities between Fitbit and GoPro, which is why I find Citron Research’s stand surprising. Citron shorted GoPro when it was trading over $90, and given the similarities, Fitbit still has more room to fall.

Moreover, with competition in the space growing, I think investors are underestimating the risk Fitbit faces. Given that wearables are a multibillion dollar space, competition in the sector is growing rapidly. Apple Watch already poses a threat to Fitbit and the arrival of Under Armour will make things more difficult for Fitbit. Moreover, Fitbit faces competition from several award winning firms in Europe, whereas it as to compete against Xiaomi in China as well.

Conclusion

Due to the growing competition, I think investors should use the recent rally to at least sell Fitbit. As opposed to Citron, I think investors can even consider shorting Fitbit at this valuation and I think the stock is overvalued.
Published on Mar 11, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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