Wall Street is finding reasons to be hopeful about Fitbit (NYSE: FIT) again. The stock has surged 35% higher in the past six months to nearly climb back into positive territory for 2017. That's a major turnaround considering shares had been down by 32% at one point in the year.
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To be sure, Fitbit's business is still in contraction, with sales headed lower and losses mounting. However, operating trends are improving just in time for the critical holiday shopping season.
With that bigger picture in mind, let's review the bullish and bearish arguments for owning the wearable specialist's stock today.
The foundation for a turnaround
Fitbit has delivered plenty of good news to shareholders recently. The company generated $393 million of revenue in the third quarter, which was near the top end of management's guidance range. Sure, that translated into a painful 22% sales decline. Yet the plunge was a solid improvement over the prior quarter's 40% slump. In fact, it marked the first time in over two years that Fitbit's sales trends haven't worsened.
Fitbit's pricing and engagement metrics suggest customers are enjoying its products, too. Average selling prices were up 12% to $105 as the sales mix tilts more toward expensive smartwatches. The company's latest Ionic device is attracting positive early reviews while helping Fitbit's tracker app dominate the download charts on both Android and iOS platforms.
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Room for improvement
On the other hand, Fitbit's profitability looks weak both in comparison to peers and with respect to its recent history. Gross profit margin shrank by 3 percentage points last quarter to 45% of sales. Garmin (NASDAQ: GRMN), meanwhile, posted much healthier 58% gross margins in its fitness tracking business last quarter.
And unlike Garmin, which produces a wide range of GPS devices for hikers, boaters, pilots, and fitness fans, Fitbit's success is highly dependent on just a few releases in the consumer fitness niche. CEO James Park and his executive team like to tout the fact that new launches make up a huge proportion of the sales base. Last quarter, after all, the Alta HR and Iconic devices accounted for roughly one-third of the entire business.
While that figure is a testament to management's success at innovating and marketing new products, it also highlights the fact that one or two botched rollouts could quickly send the business back into deep retreat.
Wait and see
Fitbit's latest forecast calls for the company to return to sales growth in the holiday quarter as revenue reaches $585 million, compared to $574 million a year ago. Management also suggested that it could eke out a slight profit, since its guidance for net income ranges from a $0.03-per-share loss to a gain of $0.01 per share. Both those top- and bottom-line figures would represent major progress for a company that in early August posted a 40% sales dive and losses of $0.25 per share.
For Fitbit to represent a good buy, though, you have to believe that its new product lineup, especially the Ionic smartwatch, will be well received by fitness fans this holiday season -- and that management has the right innovation, marketing, and pricing strategies in place to extend that success into its next round of device launches.
Yes, that scenario would lead to market-thumping sales and profit gains beginning in 2018. But it requires many things to go Fitbit's way over the coming quarters. Given those risks, I'd prefer to own the more diversified, already profitable Garmin business while watching from the sidelines as Fitbit works to stabilize itself.
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