Will Increasing Competition Make Fitbit Irrelevant?

As my readers would know, I have been bearish on Fitbit (FIT) for several months now. I first recommended shorting the stock in November 2015 and Fitbit has since plummeted over 70%. While I still think there is more downside to Fitbit, and it definitely isn’t a bargain, I think investors should be looking to cover their short positions.

Safety Margin

I will not be surprised if Fitbit falls into single-digits in the months to come. In fact, I had a $10 price target on Fitbit when I recommended shorting it months ago.
That being said, shorting Fitbit does not have the safety margin that would make the bear case attractive. As a result, I think investors should look to close their short position and book hefty profits at current levels.

In addition to the safety margin, there is also a chance on a short squeeze in the near future. According to Yahoo! Finance, roughly 28.8% of Fitbit’s float is sold short. Given the high short float, even the smallest bit of positive news can send the stock flying to over $15. Hence, I would not recommend shorting Fitbit at current levels. However, I do think the stock has more downside to offer in the long-run, which is why investors should still stay away from it.

Rising Competition

The wearables industry is growing rapidly and several companies are fighting to get a large piece of the cake. With the likes of Under Armour (UA), Garmin, Apple (AAPL), Samsung etc. all competing fiercely in the competition, I don’t see how Fitbit can continue dominating and growing at such rapid speeds.

Granted at 21x trailing earnings, Fitbit looks like a cheap stock considering its annual growth. However, with many companies, most of which are much larger than Fitbit, are competing actively in the space, I don’t see how Fitbit can dominate the market in the future.

Increasing competition will cause the company’s margin to shrink. Fitbit had to slash its earnings guidance lower due to increasing R&D expense and I can only imagine things getting worse with increasing competition.

Conclusion

For me, shorting Fitbit does not make sense at current levels. I would definitely recommend shorting it if the stock goes above $15 in the coming months. However, as of now, I think Fitbit is a sell. Fitbit still has a lot of downside to offer and increasing competition will slowly make it less relevant in the long run.
Published on Jul 1, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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