Pacific Crest increased its rating on shares of Fitbit (FIT) to "sector weight" from "underweight" late yesterday, claiming that the stock's current price better reflects investor skepticism despite continued headwinds to growth.
"Our views that drove our Sept. 29 downgrade to 'underweight' have not changed," Pacific Crest analysts Brad Erickson and Elliot Arnson said in a note.
At the time, the firm pointed to "a striking portion of people" who seem to stop wearing Fitbit's devices after a few months, underscoring a "fundamental issue" that has been driving churn and hampering growth. Pacific Crest had also cited Apple's (AAPL) threat to Fitbit's consumer business and weak initial demand for Fitbit's Charge 2 activity tracker.
Pacific Crest is not alone in worrying about Fitbit's potential, with shares of the San Francisco-based maker of activity trackers down nearly 70% so far this year on concerns of slowing growth.
For the current quarter, Fitbit expects sales between $725 million and $750 million, representing a 2% to 5% increase from the year-ago period. This rate of growth would be Fitbit's slowest ever.
The fourth quarter includes the holiday season, during which Pacific Crest anticipates "generally improving demand" that will nonetheless fall short of analysts' estimates.
The firm projects an earnings decline of 43% and 56% in 2016 and 2017, respectively, due to high spending on product development and advertising. Revenue will likely grow 26% in 2016 and drop 6.4% in 2017, Pacific Crest estimates.
"Our numbers remain below the Street, and we struggle with the sustainability of management's Q1 cash balance target," the analysts said. "However, we wouldn't expect substantive data points either way on demand until early February, when Fitbit likely reports its Q4 results. Thus, the risk/reward for remaining short at current levels has become less favorable, in our view."