Is it Finally Time to Give Up on Fitbit?

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Shares of Fitbit (NYSE: FIT) recently plunged to an all-time low after the wearables maker posted fourth-quarter numbers that missed estimates on both the top and bottom lines. Its revenue fell 0.5% annually to $570.8 million, missing estimates by $18.1 million and marking its fifth straight quarter of year-over-year revenue declines.

On the bottom line, it posted a non-GAAP net loss of $5 million, or $0.02 per share, which missed expectations by two cents. On a GAAP basis, it reported a net loss of $46 million, or $0.19 per share.

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Those bleak headline numbers likely caused investors to wonder if Fitbit, which trades at less than a quarter of its IPO price of $20, can still be saved. Let's take a closer look at the bull and bear cases to find out.

Reasons to be bullish

Fitbit's 0.5% revenue decline for the quarter actually marked a significant improvement from the double-digit declines it posted in the previous four quarters. This can be attributed to its robust growth in overseas markets, which generated 42% of its revenues during the quarter.

Its revenues from the Americas (excluding the US) rose 40% annually, its EMEA (Europe, Middle East, and Africa) revenues jumped 16%, and its APAC (Asia Pacific) revenues climbed 56%. During the conference call, CFO William Zerella said: "We think we have an opportunity to continue to grow outside the US as we expand our family of smartwatches, since we are seeing that inflection across all geographies."

Speaking of smartwatches, the pricier Ionic boosted Fitbit's average selling price 20% annually to $102 per device. Sales of accessories and other products added an additional $3.67 per device, marking a 10% jump from the previous year. Fitbit could also lock in more users as it expands its digital ecosystem, which includes its subscription-based Fitbit Coach app and its recent acquisition of digital health platform Twine Health.

Fitbit is also reining in its expenses. Its non-GAAP operating expenses represented 42.8% of its revenues during the quarter, compared to 49.6% a year earlier. That's why its non-GAAP net loss of $5 million was a significant improvement from its loss of $125.7 million a year earlier.

Lastly, Fitbit's stock looks dirt cheap, with a price-to-sales ratio of 0.7. This means that Fitbit's market cap of $1.15 billion is lower than its annual revenue, making it a lucrative takeover target for any company that wants to instantly become one of the top wearable makers in the world.

Reasons to be bearish

Unfortunately, Fitbit's US revenues -- which accounted for 58% of its top line during the quarter -- dropped 13% annually and wiped out most of its overseas gains. The brand continues to face tough competition from rivals like Apple (NASDAQ: AAPL), Huami (NYSE: HMI), Huawei, and Garmin (NASDAQ: GRMN).

Out of those five companies, only Apple and Huawei posted positive year-over-year shipment growth during the third quarter of 2017 according to IDC. Apple benefited from the launch of the Apple Watch 3, which competes against Fitbit's Ionic; and Huawei, which sells most of its fitness trackers in China, is gradually expanding into the US market with cheap devices like the Band 2.

Huami, which tied Fitbit as the largest wearables maker during that quarter, is a tough rival because it's backed by Chinese tech giant Xiaomi, which shoulders all of its design, manufacturing, and marketing expenses.

This enables Huami to repeatedly undercut Fitbit with cheaper devices with comparable features. Meanwhile, Garmin's Vivo devices target Fitbit's products across multiple price tiers.

All that competition caused Fitbit's total shipments to drop 17% annually to 5.4 million during the quarter. That's why Fitbit's gross margin remains under pressure. Its non-GAAP gross margin of 44.2% represented a big improvement from 22.4% a year earlier, but it still marked a sequential dip from 45.2% in the third quarter.

Fitbit's guidance was also dismal. It expects "limited revenue from new product introduction" to cause a 15%-20% year-over-year decline in revenues during the first quarter, compared to expectations for 14% growth. It also anticipates a non-GAAP loss of $0.18-$0.21 per share, which was well below expectations for a $0.09 loss.

For the full year, Fitbit expects its revenue to fall 7% to $1.5 billion, which is well below the consensus estimate for 7% growth. It also expects its gross margins to contract throughout the year.

The verdict: Avoid Fitbit

Fitbit's fourth quarter wasn't a complete disaster, but it also didn't indicate that a turnaround would occur anytime soon. Unless Fitbit spurs US demand, accelerates its growth in overseas markets, and figures out how to expand its margins as it pushes back against the competition, it will continue to struggle.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.