Will Increasing Competition Make Fitbit Irrelevant?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.
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.
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.
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.
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, 2016By Ayush Singh