Cue howls of derision from the masses!
I was universally panned for speaking negatively about Wall Street’s favorite wearable tech stock.
“Louis Basenese is clueless about Fitbit,” chimed one reader.
So be it. Because being clueless has never felt so good!
Fitbit’s stock is down a staggering 60% since that time.
From its post-IPO highs, the wealth destruction is even more appalling. Shares have plunged by 72%.
Amazingly, one sell-side analyst – SunTrust Robinson Humphrey’s Bob Peck – insists the “dip” represents a compelling buying opportunity.
As I’ll show you in a moment, he’s lost his mind and all credibility. And I’m afraid that if you follow his lead, you’ll lose even more – your hard-earned money.
From First to Worst
There’s no doubt that Fitbit remains the dominant player in the wearable tech industry.
The company sold 21.4 million devices in 2015, nearly double the amount in 2014.
Remember, though, Fitbit timed its stock market debut perfectly – when its headline financials were off-the-charts impressive.
For instance, year-over-year sales tripled in the quarter before its June 2015 IPO.
But to maintain its ballooning share price and valuation, the company needed to keep putting up similar numbers.
It’s simply not possible.
As I warned, Fitbit was destined to suffer from slowing growth, shrinking margins, and increased competition, which would ultimately lead to its obsolescence.
And it’s all coming to pass. Consider:
- Slowing Growth: Fitbit now expects sales to rise between 29% and 34% in 2016. That’s down from 149% in 2015 and 175% in 2014.
- Shrinking Margins: On Fitbit’s last earnings conference call, the company revealed that its EPS forecast for the first quarter would be $0.00 to $0.02. Yet analysts were expecting EPS of $0.23 per share. Why such a massive disconnect? It’s down to expensive media promotions to attract new buyers, as well as higher manufacturing costs.
- Increased Competition: While Fitbit’s chart-topping market share is impressive, it’s shrinking – and rapidly. This is due to the impressive growth of newcomers in the field like Apple (AAPL) and Xiaomi. There’s no way that Fitbit can reverse the trend, either. Not with Apple’s premium appeal and functionality. And not with Xiaomi offering a device that tracks sleep, steps, and heart rate for under $25. Fitbit’s comparable offering – the Charge HR – retails for $149.95.
From “Buy, Buy, Buy” to Bye, Bye, Bye
Despite these gale force headwinds, though, SunTrust’s Peck wrote this on January 6 (while reiterating his “Buy” rating, too):
“While we acknowledge that the competition announcements and lockup expiration add risk value, we think the almost additional $1 billion of value destruction on top of this worst-case scenario was overdone.”
Nope. On the contrary, in fact.
Since that note, Fitbit’s shares have declined another 36%, destroying another $1.1 billion in value.
Undeterred, however, Peck is still pounding the table on the stock.
On February 23, he wrote:
“While investments may be lumpy as FIT focuses on growth of the nascent market globally, we continue to believe there is a significant long-term opportunity for the company to deliver health/fitness solutions to consumers as well as enterprises and health insurers.”
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Mr. Peck can believe in the “long-term opportunity” for Fitbit all he wants. But it doesn’t exist. And at this point, nor does his credibility.
Time for Some Truth Serum
The truth reveals the fatal flaw in Fitbit’s business model: It has no recurring revenue.
Instead, the model relies on convincing existing users to keep upgrading, while attracting more and more “mainstream” customers to purchase devices.
But there’s a real problem here: The data reveals that approximately 50% of Fitbit buyers abandon their devices within the first year.
And I know why from personal experience.
I bought three Fitbit devices for Christmas gifts, including one for myself. But less than three months in, I barely use it. Nor do the other two recipients. Why? Let me count the reasons…
- The novelty wears off.
- The battery life isn’t as robust as advertised.
- Sleep monitoring is entirely unreliable. Manually “correcting” the data to indicate that I wasn’t actually sleeping, but in fact in the midst of my morning devotional time or watching a movie with my wife, is annoying.
- The heart rate monitoring capabilities are equally suspect, based on my comparison after borrowing a friend’s Garmin device with heart rate monitoring. I’m not alone here, either, as there’s a class-action lawsuit against Fitbit for failing to accurately measure heart rates. (I’m not part of it, as I’m not the litigious type).
- The device isn’t waterproof. Every shower and hand-washing requires removing the band just to be safe.
I could go on. But we’re not here for a product review.
Getting back to the investment angle and perma-bull analyst, Peck…
Fitbit Following Groupon and Zynga in a Race to the Bottom
Since Fitbit went public in June 2015, he’s maintained a “Buy” rating on the stock the entire time.
And while his early price targets of $50 (July 2015) and $52 (August 2015) appeared prescient, he’s been forced to repeatedly lower his targets since then, lest he look completely foolish as he continues to tell investors to buy on the dips.
Thankfully, though, not every analyst is being hoodwinked.
In addition to me, Trip Chowdhry of Global Equities Research believes there’s 50% more downside to Fitbit’s stock. That would suggest a share price of about $7.
“Gradually the market for single-purpose devices (fitness trackers) is heading toward zero and there is nothing FIT can do to reverse the trend,” said Chowdhry.
I recommend you continue to avoid the stock. And if you own it already, get out while you can.
As I wrote before: “The Fitbit IPO is eerily similar to the climate that preceded the IPOs for Groupon (GRPN) and Zynga (ZNGA). Each went public at the pinnacle of their respective industries. And while early investors and owners made a fortune, both stocks proved to be disastrous investments for everyday investors.”
Almost 300 days after the company’s IPO, there’s no denying Fitbit is on exactly the same path.
Ahead of the tape,