2 Tech Stocks I'd Hate to Buy: GoPro Inc and Fitbit Inc

By Markets Fool.com

With the market currently near all-time highs, investors must be very selective with the stocks they buy. This generally means looking for companies with solid growth, low valuations relative to those of their industry peers, and few macro and micro headwinds.

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In this article, I'll examine two stocks which don't fit that profile, and why investors should avoid them.

Image source: Getty Images.

GoPro

GoPro (NASDAQ: GPRO) is a niche player that simply ran out of room to grow. Many of its core customers -- surfers, skiers, skydivers, and other outdoor enthusiasts -- thought its older action cameras were simply "good enough" and didn't see any reasons to upgrade. Meanwhile, mainstream customers didn't want to spend a few hundred dollars on stand-alone cameras when their smartphones did the same thing.

As a result, analysts expect GoPro's sales to fall 15% thisyear, compared to 16% growth in2015 and 41% growth in2014. But to hit that full-year target and lift GoPro's bottom line back into the black, the upcoming Hero 5 cameras and Karma drone must boost the company's fourth quarter sales by over 50% annually. That could be very tough, since the action camera and drone markets have become increasingly crowded over the past two years. As a result, GoPro's non-GAAP gross margin -- which already fell 400 basis points annually to 42.4% lastquarter -- could continue falling as it lowers prices to stay competitive. Its operating margins will likely remain negative.

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Image source: GoPro.

GoPro is also being left behind by many other companies. For example, Samsung's Gear 360 is a tiny spherical device that produces 360-degree videos and costs just $350. GoPro's cheapest option, the $5,000 Omni, uses six GoPro Hero 4 Black cameras to produce higher quality videos, but it's far too expensive for mainstream consumers.

The Karma drone will likely be sold as an accessory for its cameras, so the combo will likely cost more than most drones with built-in cameras. Xiaomi recently launched a 4K drone in China -- one of GoPro's "fastest growing" markets -- which costs less than a single Hero 4 Black camera. Unless GoPro can widen its moat against these threats, I'd avoid the stock at all costs.

Fitbit

Fitbit (NYSE: FIT) is often compared to GoPro because both companies were first movers in their markets, posted robust sales growth followed by big slowdowns, and still lack clear moats against their bigger rivals. Fitbit introduced fitness trackers to millions of users, but it's losing that market to cheaper devices from companies like Xiaomi, full-featured smartwatches from high-end players like Apple, and fitness apparel companies likeUnder Armourlaunching wearables.

Fitbit's share of the global wearables marketdeclined from 32.6% to 24.5% between the first quarters of 2015 and 2016 according to IDC. During that period, Xiaomi's share dipped from 22.4% to 19%, while Apple's rose from nothing to 7.5%. Fitbit's sales growth reflects that slowdown -- it's only expected to post 39% sales growth this year, compared to 149% growth in2015 and 178% growth in2014.

Image source: Fitbit.

Fitbit believes that it can carve out a niche market in fashionable sports performance devices with the Alta and the Blaze. But to launch these newer products, Fitbit boosted its R&D and marketing spend, which caused its operating margin to fall from20% a year earlier to less than 2% last quarter. Its non-GAAP gross margin also fell 500 basis points annually due to warranty reserves for legacy products. As a result, analysts expect Fitbit's non-GAAP earnings to rise just 10% for the year, down from 91% growth last year.

On the bright side, over half of Fitbit's sales now come from the Blaze and Alta, indicating that it's moving away from the lower-end market and holding its own against premium smartwatches like the Apple Watch. The company also inked corporate wellness partnerships with major companies like Target, which could boost bulk orders of its low to mid-range devices. Unfortunately, neither of those catalysts can offset Fitbit's declining top and bottom line growth yet.

The bottom line

I'm not saying that GoPro and Fitbit will never bounce back -- after all, both look "cheap" with 5-year PEG ratios under 1, and both stocks trade at steep discounts to their IPO prices. But for now, both companies are running out of room to grow, boosting expenses to keep pace with bigger rivals, and struggling to stand out in commoditized markets. Therefore, I believe that the downside risks clearly outweigh the potential gains for both companies.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Under Armour (A Shares). The Motley Fool has the following options: long January 2018 $90 calls and short January 2018 $95 calls on AAPL. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.