Is Beleaguered FitBit a Value Play or a Dangerous Stock to Avoid?

This erstwhile Wall Street darling has endured its share of ups and downs. Will the stock become a high flyer again, or is it too dangerous for investors?
By Siddhi Bajaj ,

One would think that the market would have a little more faith in wearable fitness device maker FitBit (FIT) - Get Report , considering its average revenue growth rate over the past three years of almost 150%.

The stock debuted in June 2015, but merely a year after its listing is trading near 52-week lows it has shed almost 72% of its value.

Comparisons with wearable camera maker GoPro began long ago, with the companies' stocks charts almost looking the same, as investors and analysts questioned the sustainability of the interest surrounding wearables.

Next came concern that Apple with its Apple Watch would steal market share from FitBit.

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However, considering that FitBit has the first-mover advantage in the fitness-tracking wearables industry and is constantly releasing new products, is everyone being too hard on the company?

FitBit's position as a market leader has been weakening. From a 32.6% market share in the first quarter of 2015, FitBit's share shrunk to about 25% in the first quarter this year because of the Apple Watch.

The company had for a long time stood its ground by keeping its wearable devices isolated from smart watches from Apple and Samsung.

However, with the release of the FitBit Blaze, the company has perhaps taken the first step in making it like the other smart watches in the market, minus the texting and calling features. Investors were understandably unhappy with this move.

FitBit' expenditures also skyrocketed in the areas of research and development and sales and marketing as the company struggled to remain competitive.

But perhaps the biggest concern has been the management's own reconsideration of its estimates as it lowered its guidance for the second quarter.

What followed was a barrage of analyst downgrades that destroyed the value of the stock, rendering it a mere shell of its initial public offering self.

At a trailing 12-month price-earnings ratio of 24.2 times, FitBit's valuation has plunged from its historic levels of more than 90 times.

In addition, the company has a forward multiple of a mere 9.09 times, a discount to competitor Garmin at 19.51 times and even Apple at 11.04 times.

However, cheap doesn't mean value, so FitBit still needs to prove why it is a worthy investment. There are more promising and safer investments.

FitBit might be a market leader, but there is a looming threat of it losing that position because of competition from Apple, Garmin, Samsung and even Under Armour. And the emergence of smaller players that can offer wearables with similar features at lower prices is also threat.

Data from International Data Corp. showed that the share of other vendors in the category rose to 37% in the first quarter, compared with 33% a year earlier.

To stay ahead of these and other competitors that might emerge, FitBit needs to constantly evolve its offerings to give its customers a reason to upgrade and add to its existing customer count.

That doesn't seem to be happening, with sales volumes of recently launched products such as Alta and Blaze lower than previous months, according to Pacific Crest.

With new products set to hit the shelves in the second half, it remains to be seen whether FitBit can spur demand growth and have a fit holiday season.

Competition from big and small players alike is crushing FitBit and the once leading company is no longer able to do something spectacular to either improve profitability or give a boost to its top line in the short or long run. Unless FitBit pulls a rabbit out of a hat, investors should consider better investment values.

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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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