2 Fallen Stocks I'd Never Touch

Fallen stocks are usually tossed into the bargain bin because their companies have big underlying problems. If the problems can be fixed, those stocks might become undervalued turnaround plays. If they can't, they become falling knives. Today, we'll discuss two such falling knives that could injure your portfolio -- Fitbit (NYSE: FIT) and GoPro (NASDAQ: GPRO).

Image source: Fitbit.


Shares of Fitbit have fallen more than 70% this year due to the company's slowing sales growth, rising expenses, and a lack of a clear competitive moat in the crowded wearables market. Fitbit might look undervalued with a price-to-sales ratio of 0.9, but its sales growth has slowed dramatically over the past few quarters.

Fitbit's sales rose 23% annually last quarter, representing itsslowest year-over-year growth since its IPO last year. For the holiday quarter, Fitbit expects just 2%-5% sales growth, compared to 92% sales growth in the prior year quarter. The company blames that decline on manufacturing issues with the Flex 2, headwinds in Asia, and slower overall demand for its products. Fitbit's GAAP operating expenses rose 52% during the quarter, indicating that throwing more money at sales, marketing, and R&D wasn't generating fresh sales growth.

The main problem for Fitbit is that it faces too many tough competitors. Cheap fitness tracker makers like Xiaomi are gobbling up the lower-end market, Garmin has made big gains in the sports performance market, and Applelooms large in the high-end smartwatch market. Analysts expect Fitbit's revenue to rise 26% this year, butslow to 4% growth in 2017. Earnings, weighed down by rising expenses, are expected to fall 46% this year but possibly rebound 19% next year. Therefore, Fitbit's current P/E of 18 -- while lower than the industry average of 31 -- still isn't cheap relative to its negative earnings growth.


Action camera maker GoPro has many of the same strengths and weaknesses as Fitbit. Like Fitbit, it had a first mover's advantage in its core market and established a strong brand presence. Like Fitbit, GoPro's sales growth was explosive at first, but peaked after running out of ways to reach new customers. GoPro's sales rose 41% in 2014 and 16% in 2015, but are now expected to fall 22% this year.

Image source: GoPro.

GoPro tried selling cheaper devices for mainstream consumers last year, but many consumers didn't want a separate camera when they used their smartphones most of the time. The company discontinued its low-end models earlier this year, and declared that the new Hero 5 camera and Karma drone would lift it back to profitability this holiday quarter. But production delays, retail disputes, and tough competition have cast major doubts on that forecast.

Last quarter, GoPro reported a 40% year-over-year decline in revenue, reduced its growth forecast for the holiday quarter to 43% (at the midpoint) due to production issues related to the Hero 5, and admitted that it wouldn't be profitable on a non-GAAP basis until 2017. Analysts had previously expected about 55% sales growth. GoPro believes that cutting costs will get its bottom line back into the black, but doing so could throttle its ability to produce new products or market them effectively. GoPro stock looks cheap with a P/S ratio of 1.2, but just as with Fitbit, that ratio is meaningless if sales fall through the floor.

Is all hope lost?

I don't like kicking companies when they're down, but Fitbit and GoPro's prospects look bleak. Fitbit's future relies so heavily on bullish expectations for the wearables market that there's no contingency plan if sales of fitness trackers and smartwatches peter out. GoPro is trying to diversify its business, but its introduction of new products (VR rigs, drones) as camera accessories indicates that it's still basing its entire business around its cameras.

Unless Fitbit and GoPro try to grow beyond their core markets of fitness trackers and action cameras, their sales growth will continue fading, margins will crumble as prices are slashed, and bottom-fishing investors looking for bargains will be badly burned.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, and GoPro. The Motley Fool has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, short January 2019 $12 calls on GoPro, and long January 2019 $12 puts on GoPro. 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.