Better Buy: Under Armour, Inc. vs. Fitbit

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As a business, it's never a fun experience to fail a test of your pricing power. Competitors swoop in to challenge your market share, but your brand doesn't provide the deep moat you thought it would. As a result, sales and margins drop, bloated inventory must be discounted, and profits turn into losses.

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Under Armour (NYSE: UA) (NYSE: UAA) and Fitbit (NYSE: FIT) are both going through this painful process right now. Their stocks have become much cheaper, too, potentially creating opportunity for long-term investors.

So, let's stack the two former Wall Street darlings against each other to see which one makes the better buy today.

Under Armour vs. Fitbit stocks

Metric

Under Armour

Fitbit

Market cap

$8.9 billion

$1.3 billion

Revenue

$4.8 billion

$2.2 billion

Sales growth

22%

17%

Profit margin

5%

(9%)

Price-to-sales

1.8x

0.64x

52-week price performance

(44%)

(56%)

Operating trends

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Fitbit is facing a far bigger sales growth challenge. The leader in wearable fitness tech last posted a 41% dive in quarterly earnings as it sold just 3 million devices, compared to the 4.8 million it delivered in the year-ago period. Under Armour had its growth pace cut in half, but the sportswear specialist is still growing. Revenue ticked up by 7% last quarter.

Both companies are banking on innovation to lead them back to robust gains. For Fitbit, that starts with delivering a mix of feature-packed products that thrill users this holiday season and convince a large portion of its customer base to upgrade.

The company brings a few serious assets into this fight. Its design strength is evidenced by the fact that products introduced over the past year -- the Charge 2, Alta HR, and Flex 2 -- accounted for 84% of revenue last quarter. Those engineering wins are also meeting with a user base that's open to trying out new products. Over one-third of Fitbit's sales last quarter were from customers who were already in its device ecosystem. 

Under Armour, meanwhile, has to get its range of sportswear and footwear goods back into the premium side of the market. The company learned this past holiday season that it can compete against value-based rivals, but only at the expense of profitability and weaker brand prestige. CEO Kevin Plank and his executive team are making adjustments that touch product innovation, marketing, and retailing strategies -- all aimed at that bigger goal of protecting the premium positioning of the Under Armour brand. 

Which is the better buy?

The upcoming holiday shopping season will provide a key test of both companies' rebound plans. Under Armour is targeting full-year sales growth of between 11% and 12%, compared to the prior year's 22% spike. Its reliance on the weak U.S. sportswear market will limit its growth, but the retailer still sees big long-term opportunities in expanding internationally and in pushing deeper into footwear.

Fitbit is aiming for 2017 revenue of $1.6 billion at the midpoint of guidance, which translates into a 26% decline. The good news is, since its growth is dependent on just a few products, a surprise hit could dramatically improve those fortunes. The wearables specialist has also identified a huge untapped market potential in the health industry.

Under Armour should be the stock choice for all but the most risk-loving investors, though. It boasts a larger, steadier sales base and remains profitable. The worst-case scenario for this company likely involves underwhelming growth and gross margins that trend lower over time. In Fitbit's case, shareholders could endure collapsing demand and ballooning net losses -- especially if the next round of product releases fails to spark demand. That risk is too big, in my view, even though Fitbit is far cheaper on a price-to-sales basis right now.

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Demitrios Kalogeropoulos owns shares of Under Armour (A and C shares). The Motley Fool owns shares of and recommends Fitbit and Under Armour (A and C shares). The Motley Fool has a disclosure policy.