Is Fitbit Inc. (FIT) a Buy?

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The outlook for its industry is bright, but no one would use that term to describe Wall Street's hopes for Fitbit's (NYSE: FIT) business. In fact, the wearable tech specialist was recently the target of a head-turning stock downgrade from a Morgan Stanley analyst who thinks shares could dive to $4. That would put the stock down more than 90% since its initial public offering in 2015.

I laid out my own bearish take on the stock in early December, concluding that investors would be better off waiting for evidence that Fitbit's recovery was gaining steam. Now that the holiday season results are in and Fitbit's 2018 product lineup is taking shape, let's reconsider the prospects for this struggling stock.

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A rough year

Very little went right for Fitbit in the fiscal year that it recently closed. Sales dove 25% as consumer demand shifted away from the type of activity trackers that the company built its brand upon. New devices like the Iconic smartwatch helped lift average selling prices, but that success wasn't nearly enough to make up for the fact that Fitbit sold just 15.3 million products compared to 23 million in the prior year and 21 million in 2015. Sales came in below management's target over the critical holiday shopping season and profitability was a disappointment, too, as it only improved to 43% of sales from 39%.

Compare those results to Garmin's (NASDAQ: GRMN) trends, and it's clear that Fitbit isn't simply struggling due to a weak industry. The GPS device giant managed higher sales last year as growth in its smartwatch category helped offset flat results in its fitness trackers. Overall, Garmin's gross profitability improved for the second straight year, rising to 58% of sales.

Outlook and valuation

Garmin is predicting modest revenue and profitability gains in 2018 while Fitbit has braced its shareholders to expect another tough operating year as it tries to pivot into new product categories. Sales should drop by about 7% to $1.5 billion, executives said in late February. That slump, plus the continued shift in demand away from basic fitness trackers, will likely hurt profitability for a third straight year.

That might turn out to be a conservative forecast since it doesn't include the positive impact from new releases like the Versa smartwatch that the company just began selling. That device has a few things going for it, including a relatively low price and a battery that can go several days in between charges. Yet investors shouldn't count on the Versa being a breakout hit, especially after Fitbit's prior smartwatch bet fell far short of management's expectations.

But even if Fitbit's new mass-market approach resonates with consumers, that success would just mark the start of what's likely to be a multi-year turnaround effort. The company needs to shift its design focus, on both the hardware and software side, toward smartwatches in a way that elevates its products over competition like Garmin and Apple. It has another challenge that these peers don't face, too, in that Fitbit needs to dramatically cut costs to account for the fact that its sales base has plunged in recent years.

Sure, investors are being offered a huge discount on the stock that reflects these challenging dynamics. And a healthy balance sheet should buy management time to shift strategies. Still, there's currently no reason to expect these trends to dramatically improve, and the company's biggest demand tests won't come until the upcoming holiday shopping season. Thus, investors should still be happy to stay away from this stock and instead look to Garmin as a good way to gain exposure to the wearable tech industry.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fitbit. The Motley Fool has a disclosure policy.