Is There a Silver Lining for Fitbit Inc?

In this segment from Market Foolery,Chris Hill is joined by Taylor Muckerman and Jason Moser as they consider the dimming future of Fitbit(NYSE: FIT). While the market has punished the stock for a recent downward revision to its sales forecast, that does not mean it is time for investors to buy on the weakness.

You need to start by asking yourself two hard questions: What do you think is the catalyst that could turn this device maker around? And is the company a worthy acquisition for some of its bigger competitors?

A full transcript follows the video.

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This podcast was recorded on Jan. 30, 2017.

Chris Hill:Fitbit does not report their fourth quarter until late February and today the company confirmed, what some had feared and at least one person in this studio had predicted, which is that this report is going to be ugly.

Fitbit lowered their sales guidance and they are laying off 6% of the work force. Let me just . . . stick with me on the numbers here, because when companies offer guidance, they are offering a range. Which makes perfect sense, they are not going to be able to predict it down to the dollar. The sales guidance range that Fitbit had offered was, "Well, we think sales are going to come in somewhere between $725 and $750 million." They came out today and said, "Actually, it is going to be around $580 million," which is a massive drop and the stock, not surprisingly, down about . . . at one point it was down 16% to 17%. It has come back up a little bit, but it is still down 11% to 12% percent.

Jason Moser:Yeah, I would warn investors who are thinking that maybe this is the opportunity to pick up shares on the cheap to give that notion a lot of thought. You need to be able to identify the catalyst that will turn this thing around, because I don't think there is one personally. I am not trying to be glass half-empty Jason here. It is just the way it is. We have talked about Fitbit a lot since it went public. It's really been a bad investment. I don't like saying that. I like what they stand for, right. I mean they are really trying to do a good thing, I think, in making people more aware of their health and encouraging fitness and what not. At the end of the day, it is a gadget company, it's a one-trick pony, for the most part. Its one trick, it turns out, to kind of suck. It is not very good at what it does.

Taylor Muckerman:It has got a class action lawsuit, or did for the heart rate monitoring and then it couldn't measure your steps properly.

Moser:I mean any time you have a situation where you feel like, "Okay, I am wearing this thing for this one reason" and now, it's being brought into question as to whether it actually does it well or is it even doing it correctly.

It is hard to gain that trust back, I think, ever. Most consumers who maybe on the fence in thinking maybe, maybe not. There are plenty of reasons to go ahead and think maybe not now. Like you said, this was a major, major guidance cut. The midpoint of guidance from then to now, that is about a 20% change. This is a company that is going to be very dependent on growing that top line in order to improve its business.

This is essentially . . . what is going on right now is likeGoPro2.0, in you're seeing this company has hit its peak and now, I think, what we are going to see here now going forward is a lot of ratcheting back of guidance. They're obviously going to be cutting cost, unfortunately letting some people go, you're going to see margins starting to compress, you are going see cash start to burn, and you're going to start to see these guys try to figure out what do we do here to sort of right the ship. I am not saying that's an easy answer, because I don't know what they do. It is a great example of where you have a company where the co-founders who are leaders there,forward thinking cultures. Those are all great qualities, but they are just that, they are qualities. I think it is important to note that those are things that we like to find in investments, but they don't mean that they will actually be good investments.

Muckerman:This comes at a time when people are spending money. Consumer confidence is as high as it is in January, in the last 12 years. Across any month, a lot of that has to do with the election. People thinking their taxes might get cut and what not. Consumer confidence is up, holiday sales were strong, but this isn't a sticky product.GartnerResearch said that in the U.S., U.K., and Australia, 30% of the folks that have a smartwatch or a fitness tracker have stopped using it within a year.

So, if you are not getting people to reup on the newest product in your cycle, and people obviously don't see the benefit of continuing to use it, it is just a dying breed and they are trying to say that maybe they can help save lives by teaming up with healthcare companies. I think they teamed up withMedtronicto allow their Fitbit app to input its data into Medtronic platform to combine the analysis of diabetic's glucose levels with their activity levels to try to monitor that. So maybe there is a future there. It is going to take some proving to do that and this is still a small test with Medtronic and less and less people are using their product in the first place.

Moser:I think it best to just adjust the market opportunity.


Moser:I think initially when this company went public, the perception at least was the market opportunity was as big as the number of people on the face of this planet. Everybody could wear one and that is just turning out to just not be the case.

Hill:You mentioned, Jason, you thought this was GoPro 2.0. I was thinking this morning, when I was reading though the coverage of this. This is reminding me actually of Flip Cam.

Remember Flip Cam? Which was revolutionary until the iPhone came along and Android phones mirroring what the iPhone was doing and then all of a sudden, everybody who has a mobile phone has a camera in it. Then it ends up getting acquired byCisco Systemsand then Cisco Systems quickly writes down that entire thing. I have said this before, I think the likely outcome for Fitbit is an acquisition of some sort and to your point, Taylor, about them partnering up with Medtronic. They ought to be . . . if they are not talking to Medtronic about . . . because Medtronic is a big company . . .

Muckerman:Yes it is, yeah.

Hill:. . . that is very well-established in terms of medical devices. That is one of the things I was trying to think about. Okay, if you think someone's going to buy Fitbit, and I think someone is, I don't know what the price is going to be, but I think someone will buy them. Then the question becomes, "Well, who's the likely candidate?" Any time we talk about potential acquisitions, our mind tend to go toward . . . tend to go broader than what makes sense and they also tend to go to "Well, who has got the money?" So in the tech . . .

Moser:Well at this point, I even think I even have the money.

Hill:But you hear that all of the time. It's like, "Well, you knowApplecould buy them." Well yeah, you know, look what Apple has.

Moser:They have a phone, they don't need it.

Hill:They are not going to buy them. But Medtronic actually makes sense to me, as opposed to . . . Jason, one of the companies I was thinking about was . . . well, who's spent money on health fitness app recently?Under Armor. Well, yeah, I don't think Under Armor is going to buy this company.

Muckerman:No, because they will just embed this in their clothes and not have you wear something on your wrist. Maybe an insurance company out there lowering your premiums based on . . . likeProgressivehas the thing that you plug into your car, so if you drive more safely, your insurance premium goes down. Maybe if you are more active, your insurance premium with this Fitbit. I could see people strapping it to their dog collar and "Get out there and be somebody pup."

Moser:Look at an example of a business where you probably thought acquisition at some point or another. LeapFrog, right? We talked about LeapFrog a lot on the way down and how it was kind of neat what they had, but you could tell more and more that their window for their market opportunity kept on getting smaller and smaller because kids were just making their initial devices like Kindles and iPads and iPods and what not. I look at Fitbit and I think who wants to actually take on that headache.

I have always been somewhat critical of Apple on the Apple Watch side because I felt like they built a device that tries to do to much as opposed to something where, given their resources, the technology, the brand power, I think Apple could actually develop a Fitbit style, truly dedicated fitness device that could completely wipe Fitbit out. Without even thinking twice, because of everything I just said there, the finances, the resources, the brand power, what not. I don't even know that I would look Fitbit ultimately as an acquisition at this point because you got to figure, who really needs it, right? I don't know that anybody actually needs it, because what they're doing isn't necessarily so special.

Muckerman:You could develop it for cheaper than you can buy it.

Chris Hill owns shares of Under Armour (C Shares). Jason Moser owns shares of Apple, Under Armour (A Shares), and Under Armour (C Shares). Taylor Muckerman owns shares of Under Armour (C Shares). The Motley Fool owns shares of and recommends Apple, Fitbit, Gartner, GoPro, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of Medtronic and 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. The Motley Fool recommends Cisco Systems and Progressive. The Motley Fool has a disclosure policy.