Will Fitbit Shorts Keep Winning?

Fitbit (FIT) released its earnings report earlier this week, and like last time, the company met the analysts’ estimates on revenue as well as earnings. And like the last time, Fitbit failed to provide a solid guidance for the upcoming quarter, thereby leading to a crash in stock price.

Fitbit reported Q1 EPS of $0.10, beating the analysts’ estimates by $0.07. On the sales front, Fitbit’s revenue jumped 50% year over year, to $505 million, beating the consensus by $62.2 million. The stock tumbled almost 15% due to Fitbit’s weak Q2 guidance.

Fitbit is guiding for Q2 EPS of $0.08-$0.11, below a $0.26 per share consensus.
Q2 revenue is expected to be between $565 million and $585 million, comfortably above a $532.8 million consensus. Despite the strong revenue guidance, the market wasn’t pleased with Fitbit’s weak EPS guidance.

Increasing marketing expenditure has put downward pressure on Fitbit’s margins. The company’s gross margin fell 320 basis points to 46.6% year over year. The drop in gross margin can be attributed to the growing competition. Fitbit is facing stiff competition from giants like Apple (AAPL), Xiaomi, Garmin and there are new players like Under Armour (UA) entering the market, which is also harmful to Fitbit in the long run.

I have been bearish on Fitbit for quite some time and have recommended investors to short it on multiple occasions over the last few months. Fitbit is down over 60% since my initial short call, and I am still uncertain about the company’s future going forward.

Increasing competition from new players likes Under Armour can put more pressure on Fitbit’s margins. Under Armour is trying to compete against Fitbit on price and given the success of its recently released wearables, it is highly likely that Fitbit is destined to lose market share to the company.


After the recent drop, Fitbit is now trading at just 22x trailing earnings. Given that Fitbit is a growth stock, the valuation seems pretty cheap. However, I am still not sure about Fitbit’s future prospects. Due to the increasing competition in the wearables space, Fitbit will find it very difficult to maintain its position as the market leader.

Fitbit is a lot like GoPro and its business model is based on a fad. Since the stock has already dropped over 60% since my initial short recommendation, I think it is time for investors to take their profits off the table by covering their positions. I reckon investors should wait on the sidelines for the stock to pop to open a short position again.
Published on May 5, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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