Why Fitbit and Facebook Are Very Similar Companies (NYSE:FIT, NASDAQ:FB)

- July 29, 2016

Fitbit stockIt has proven quite dangerous for any investor who chooses to buy Fitbit (NYSE:FIT) stock ahead of earnings, or for any analyst that goes on record with a bullish outlook. However, after a 70% loss the last year, there comes a point in time where the company itself must be considered, and not the possible stock reaction.

That said, Fitbit has beat analyst expectations and raised guidance in each quarter since its IPO. It has consistently gone toe-to-toe with big tech giants with larger ecosystems in the wearables space, and despite being a basic wearables maker until earlier this year, FIT has won that battle.

As a result, BNL Finance is issuing an “Outperform” rating with a total score of 85 ahead of earnings.

FIT stock problem not “Fitbit” related

Had Fitbit been any other company in the world, in any other industry, it would trade well over $50/share. In fact, there is another tech company that is very Fitbit-like, that’s Facebook (NASDAQ:FB). Facebook continues to beat earnings expectations and raise guidance on a quarterly basis. Furthermore, its beats are creating even bigger margins of separation from the consensus as the company grows larger, with accelerated growth. It makes no sense, and has left Wall Street and the investment community scratching their heads.

Fitbit has done the same exact thing. When FIT became a public company in June of last year, analysts expected full-year revenue of $1.4 billion. It ended up creating over $1.8 billion. Furthermore, its expected 39% growth this year is about double what the street expected at the end of last year.

Clearly, there is a huge disconnect between FIT stock performance and Fitbit’s actual performance. And the reason lies in Fitbit’s hardware sales business model. There is no recurring revenue stream.

Fact is that investors don’t want to worry about demand for future product cycles every six months. When Fibit was selling basic wearables, it had no choice. However, with Fitbit launching its first smart wearable, the Blaze, and having personal training/fitness services available with upgrades, it will be interesting to see if the company discloses A) revenue from these new recurring services and B) accelerated accessory sales due to increased demand for personalizing the higher priced Blaze.

Regardless, FIT stock has been flat the last six months. At 10x FY2017 EPS, Fitbit stock is cheaper than its ever been, and we don’t see much risk below its current price.

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Business growth — 10

FIT’s past and current growth is undeniable. Of course we don’t know how long it will last, but for the time being it is quite special.

Macro outlook — 8

All analysts and research firms expect continued growth in the wearables space, especially for smart wearables. Yes, the industry is crowded, but so far Fitbit has thrived above competition. Now that it is entering and producing smart wearables, it has a better chance to keep its leading position.

Profitability — 7

The one big knock against FIT is that margins have consistently declined over the last year. It is still profitable, but spending big money on R&D and SG&A costs.

Catalyst — 9

The catalyst is pre-earnings, a historically scary time for FIT stock owners. Given that Q2 guidance is what caused Fitbit’s last big double digit crash, expectations are very low, and the stage set for big FIT gains.

Balance sheet — 10

Vision — 9

CEO James Park knows the wearables space better than anyone. He knows what the consumer wants. This, along with the vision to realize a need for smart wearables and services proves that there is no one better to lead to Fitbit. Now, if he could only figure out Wall Street.

Valuation — 10

Risks — 6

There is always the risk that Apple, Google, Microsoft, or Garmin will gain momentum and put an end to Fitbit’s remarkable run. While this remains a legitimate risk, I think it was more realistic last year as competing smart watches were competing against Fitbit’s basic hardware. Fitbit still thrived.

Short-term outlook — 9

The fact that FIT stock has stayed flat the last six months is very telling. The stage is perfectly set for an earnings beat and a strong Fitbit stock reaction. If that happens, sentiment could improve and push the stock much higher. In other words, FIT is due for a big reversal higher.

Long-term outlook — 7

The long-term outlook for Fitbit stock is enormous. If it launches successful smart watches, further develops its operating system, and creates a legitimate services business from smart wearables then FIT stock could triple or more over time. However, if those noted risks become a reality, then FIT stock may be appropriately valued long-term.

Total Score — 85

The bottom line is that FIT stock looks very enticing ahead of earnings with fewer downside risks than ever before. It’s not a bad buy ahead of earnings, and could be a great hold. But as of this moment, it is still not a stock you want to buy, hold, and forget. If you can get some profits out of Fitbit earnings, take it.

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2 Trackbacks

  1. […] recently, I explained that Fitbit performs very similar to Facebook Inc (NASDAQ:FB), whose operations have driven its stock to become one of the most valuable […]

  2. […] the Fitbit Blaze now six months old, I thought that Fitbit had a great opportunity to unveil a new services segment. This would showcase a new recurring revenue stream associated […]

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