Better Buy: Fitbit Inc. vs. Nike
Fitbit Inc. (NYSE: FIT) and Nike Inc (NYSE: NKE) are two of the best-known names in fitness and sports. However, despite each one being a leader in its respective category, the two companies find themselves on shaky footing these days.
Just 10 years old now, Fitbit pioneered the wearable fitness market with a range of fitness trackers and has become synonymous with the industry it leads. However, two years after its IPO, the stock has fizzled as sales growth has turned negative and profits have flipped to losses.
Nike, meanwhile, is one of the best-known consumer brands in the world and remains the global leader in sports apparel and footwear, in spite of challenges from Adidas and Under Armour. Like Fitbit, Nike has also stumbled of late as revenue growth has slowed, and the company is losing market share to rival Adidas. In a sign of the times, the Swoosh said it would lay off 2% of its corporate staff, or about 1,400 people, as it realigns its consumer-level strategy.
As the chart below shows, Fitbit stock has plunged since its IPO two years ago, but Nike has also measurably underperformed the S&P 500 and is well below its all-time high even as the broader index climbs to new records.
With both stocks looking for answers, let's take a look at what each one has to offer today to determine which is the better buy.
Stepping the wrong way
Fitbit's two years on the stock market have been filled with little more than disappointment. The leader of the promising wearable fitness industry debuted with surging revenue growth and profits, but both have since disappeared. In its most recent quarter, revenue fell by 41% to $299 million and the company posted an adjusted loss per share of -$0.15.
Management blamed excess channel inventory for the sharp decline in sales, and said that problem would be ameliorated in the second half of the year. CEO James Park added that 2017 would be a "transition year." In order to return the company to growth, management has undertaken a restructuring plan that involves dividing the company into two business segments: Consumer Health and Fitness, and Enterprise Health. The company also said goodbye to two top executives in part of a larger executive shuffle, and laid off 6% of its staff in an effort to reduce operating expenses by $200 million this year. Other components of the restructuring plan include entering the smartwatch category, expanding in Europe, and licensing its accessories rather than managing them directly.
Fitbit offered investors a bit of good news in its most recent report when the company said that 84% of revenue came from new products created in the last 12 months, a sign that efforts to improve its devices have paid off. However, Fitbit is unlikely to emerge from its current slumber until the fourth quarter at the earliest when it laps a particularly weak performance in 2016 and the restructuring plan has had enough time to gain traction. Even so, analysts at this point see losses for the company through 2020.
A brand giant at a crossroads
Like Fitbit, Nike is fresh off its own restructuring plan. Two weeks ago, the sneaker giant said it would launch a new strategy called the consumer direct offense.
The company plans to focus on direct sales with efforts like tourist-friendly experiential stores in fashion capitals around the world, much like the one it opened in New York's SoHo neighborhood last year.
Management also said it would streamline its geographic structure from six regions to four to make decision-making and implementation more efficient. And it aims to speed up product innovation and development, a likely response to Adidas, which has left Nike flat-footed with new technology like Boost and Cloudfoam. The German sportswear giant has also benefited from a retro fashion trend that's brought its classic styles like Superstar and the Stan Smith back in vogue. In fact, the Superstar was the top-selling sneaker in the U.S. last year, unseating Nike for the first time in a decade.
The Swoosh still owned the remainder of the top ten, a sign that there's no need to ring the alarm bells, but its recent performance nonetheless could use a boost. Future orders, long seen as a leading indicator of the company's performance, have fallen to flat growth, and revenue is only increasing in the mid-single digits. Investors will learn more when the company reports fourth-quarter earnings on Thursday.
Which one is the better play?
While both Nike and Fitbit are struggling today, their challenges are far from equal. Fitbit is a young company in an unproven industry that's now losing money and seeing sales fade away. Nike, meanwhile, is a global giant with nearly $35 billion in annual revenue and the dominant player in sports apparel. Despite the stock's weak performance, sales and profits continue to grow, though slower than investors would like. Still, Nike has the brand strength to move past its current woes and return to vigorous growth, and the stock offers some value today at a P/E of just 22.
Risk-seeking investors may choose to take a chance on Fitbit, but its track record is a cautionary tale, and swooning tech companies often have trouble recruiting new hires, which could lead to greater woes. While the fitness-tracker maker could strike it rich by breaking into the healthcare business, that doesn't seem to be on the horizon for now. Nike, on the other hand, has been one of the best stocks on the market since its IPO in 1980. Chances are it's got a few more wins under its belt. It's the better buy here.
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Jeremy Bowman owns shares of Nike and Under Armour (C Shares). The Motley Fool owns shares of and recommends Fitbit, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.