Despite Recent Drop, Fitbit Could Be a Good Bet for Investors

Fitbit's announcement that it would release new shares sent the stock price spiralling, but the company's most recent quarter, and the growth of the wearables market, bodes well.
By Siddhi Bajaj ,

Wearable fitness devices maker Fitbit (FIT) - Get Report  had the ingredients in place for a spectacular third quarter earnings report.

To be sure, the company beat analysts' expectations, and then some. Fitbit generated $409.3 million in revenue for the quarter compared to a projected $359 million. 

However, following its report, the company announced that it would release new shares. That sent the stock spiralling by about 9% in early, after-hours trading. 

The Wall Street darling appeared destined to join a long list of once-great stocks that sputtered out. But Fitbit may still represent a good value for investors. It's difficult to ignore the success of the most recent quarter. The wearables market is supposed to continue skyrocketing, and analysts have not changed their largely rosy view of the stock. 

It's important to take a closer look at the story behind the price decline to determine what might be in store. 

A flood of Fitbit shares

As soon as Fitbit announced it would release another set of shares, investors dumped the stock.

The market witnessed a "share-deluge" of more than 21 million shares, 7 million from the company and 14 million from "certain shareholders." Shares from undisclosed shareholders were available after restrictions were lifted on selling shares. Surprisingly, the cap on selling Fitbit's shares was removed way before the initial mid-December schedule.

With the number of outstanding shares expected to increase 3.5 times from 8.4 million, things didn't seem under control, spooking most investors.

Battling the competition

Despite Apple, Samsung, Alphabet, Microsoft, and Garmin all offering similar versions of the wearable technology and often delivering unique add-ons extending beyond Fitbit's products, the company insisted that increased  competition had not impacted sales.

Referring specifically to the Apple watch, Fitbit co-founder and chief executive James Park suggested it had "no material impact."

Fitbit's third quarter sales figures seem to support his claim. The AppleWatch was released in April, but Fitbit, contrary to expectations of a decline, sold 4.8 million devices, up from the previous quarter's 4.5 million.

It is important to note that both products are available at two different prices and therefore serve slightly different markets. While Fitbit devices are available in the range of $60 to $250, the Apple Watch begins at $349 and can cost over $1,000.

Way ahead of the perception curve

As the misfortunes of once-strong stocks can attest, some companies thrive for only short periods. Will Fitbit belong to that group? The data and analysts' perspectives suggest otherwise.

Fitbit's third quarter revenues rose over 168% compared to the same quarter a year ago and overshot predictions by 14%. While analysts estimated that EPS would come in at 10 cents a share, Fitbit delivered 24 cents a share.

For the fourth quarter, Fitbit management declared a heartening set of guidance parameters, with its expectations for sales and profits much above what analysts have suggested.

Furthermore, the latest report by the International Data Corporation conveys serious optimism for the wearables market. For the end of the year, IDC expects 76.1 million wearables to be shipped out. By 2019, it expects this number to touch 173.4 million.

IDC has even acknowledged the dynamic pace of growth in this space. This is the principal reason why it revised its outlook upwards barely four months since its release; IDC has now raised its outlook for 2015 and 2019 by 5.5% and 11.4%, respectively.

It's no wonder then that several analysts are continuing to display faith in Fitbit's story.

For starters, post the earnings and the stock sale announcement, all 16 analysts tracked by FactSet kept their ratings unchanged, with a target price at 35% above the current price. While Cowen reiterated its "Market Perform" rating, Piper Jaffray and Leerink reiterated their "Buy" ratings.

Overall, most analysts continue to be bullish about Fitbit. It remains to be seen, however, if investors hoist the stock upwards, or if Fitbit closes its dramatic rise the GoPro (GPRO) - Get Report way -- the other wearable device maker whose stock soared soon after it went public, before investors decided to dump it.

If you're worried about weak stocks like GoPro that should be dumped immediately,  read this free report on the world's most dangerous stocks. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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