Fitbit Buyout Speculation Is Pretty Ridiculous

Shares of Fitbit (NYSE: FIT) spiked higher in the early hours of trading on Tuesday, and the few outlets discussing the move are pinning the uptick on takeover speculation. Chatter earlier this month that Apple (NASDAQ: AAPL) was in talks with Aetna (NYSE: AET) to provide the insurer with free or low-cost Apple Watch to its roughly 23 million health insurance members -- a win-win idea, if it pans out -- is reportedly spawning speculation that rival insurers may want to acquire Fitbit whole for some serious skin in the wearables market.

The rumor doesn't hold up. Why would an insurer take on what is now a company that has posted three straight quarterly deficits -- coming off of three consecutive quarters of double-digit year-over-year declines in revenue -- when it can just do what Aetna's doing and negotiate a bulk discount? Fitbit is already a partner with a growing number of corporations and organizations that subsidize its activity-monitoring gadgets. Why buy the former cash cow when you can get its milk for a modest fee? Taking on an out-of-favor upstart that would be dilutive to earnings isn't going to be high on the wish list of health insurers, and we're just starting to scratch the surface.

If the Fitbit doesn't fit a bit ...

Fitbit is coming off a brutal second quarter in which it posted another quarterly loss on a 40% plunge in revenue. It did boost the low end of its guidance range -- now targeting $1.55 billion to $1.7 billion in revenue for all of 2017 -- but that is still 22% to 29% below what it rang up last year.

A purchase of Fitbit may come cheap. The stock is trading for a little more than a quarter of where it was when it went public two summers ago at $20. However, it's hard to fathom any publicly traded health insurer announcing an opportunistic purchase of Fitbit and the stock not taking a hit.

Fitbit isn't dead. It shipped 3.4 million devices in its latest quarter. It has now fallen behind China's Xiaomi in unit volume worldwide, but it's reportedly still ahead of Apple as most analysts and research firms peg the Apple Watch shipments during the same period as just below 3 million. Fitbit has struggled to put out a full-blown smartwatch that could stand up to Apple Watch, but there's still a market for its lighter and more importantly cheaper health-focused wristbands.

Fitbit may work out as an investment at current levels, but an outright buyout doesn't seem to be in the cards. An Aetna rival willing to make a fundamentals-altering major order may decide to make a timely investment as part of the negotiations, but more for the speculative pop than a prelude to a total acquisition. There's a lot of pessimism surrounding Fitbit given its recent funk, and this isn't the first time that buyout chatter has provided a temporary lift to the stock. It won't be the last time we see this happen. Fitbit will need to earn its way out of its rut, and that will come at the hands of new products and deals with companies to subsidize its wearables to encourage more active lifestyles.

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David Gardner owns shares of Apple. Rick Munarriz owns shares of Apple and Fitbit. Tom Gardner owns shares of Fitbit. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has a disclosure policy.