Why Fitbit Inc. Just Lost a Third of Its Value

Image source: Fitbit.

What happened

Fitbit Inc. (NYSE: FIT) stock had its worst single day ever on Thursday after the company's disappointing Q3 earnings showed a reasonable quarter but guided for a lousy fourth quarter, which includes the all-important holiday season. As of 11 a.m. EDT, the stock was down 30%.

So what

For the third quarter, Fitbit's sales rose 23% year over year to $504 million. Net income, however, was cut nearly in half from $45.8 million in Q3 2015 to$26.1 million. Fitbit's sales growth has been slowing dramatically in recent quarters, and slowing earnings is troubling for many on Wall Street.

The IDC, the leading source of wearables market share data, came out with their most recent round of market share data in September, which showed the basic wearables market (those that don't support third-party apps like smartwatches do) was continuing to grow, up 26% year over year. Fitbit has lost some of its market share over the last couple of years, but these Q2 IDC numbers showed that it had ticked up slightly over the last year and had performed better than most of its competitors.

Yet, in Fitbit's Q3 earnings, the company guided that for the upcoming quarter, which includes the holiday season and usually comprises about 40% of Fitbit's annual sales, sales growth would be just 2%-5%. Analysts were expecting much higher."We continue to grow and are profitable. However, not at the pace previously expected,"said CEO James Park.

Now what

There still appears to be a large opportunity in the wearables space.Analysts at Scalar Market Researchexpect the market to grow by 138% by 2021, to $71 billion. However, while the market is growing quickly, so are the number of competitors looking to take their share of it, and many of them with far better products than Fitbit or similar products at lower prices.

Fitbit has increased its research and development spending by nearly 150% in the nine months ended Sept. 30 over the same time last year. So far, each round of Fitbit wearables has been an incremental upgrade over previous versions, but so far, nothing that really sets Fitbit apart in an increasingly competitive industry.This big jump in R&D could mean that there are some exciting new products in production.

The stock has certainly been volatile in its short life. After going public in June 2015 at$20 a share, its price more than doubled to $50 in just two months. Since then, it has fallen over the next year to its current low of $9, its lowest ever, during today's onslaught. There are certainly many risks ahead for Fitbit, and we have yet to see if any new products will actually move the needle on earnings. Still, following the recent sell-off, Fitbit shares are trading at just seven times forward-looking earnings estimates.

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Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Fitbit. 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.