Hot Stocks

Why Fitbit Inc (NYSE:FIT) is an Underdog

Fitbit Inc (NYSE:FIT) falls into a class of stock that we, as a rule, don’t really like. Let’s say it another way: that bar is way, way, way higher for stocks like FIT or GPRO, which are really fighting a losing battle as a growth stock with no moat producing what is ultimately destined to become a commoditized item if the business context in which they operate manifests its most ideal form.

In other words, the best possible world for FIT to exist within would inevitably be a world where they are in aggressive competition with Apple, Microsoft, Google, and a host of niche players that surprise with great innovations. The most successful context for FIT would actually be a world where there is very little demand for what they do. So, even if they execute extremely well over the short run, they are unlikely to ever inspire conviction as expressed through premium share valuations because they can never “own” their primary niche. That said, let’s see the numbers.

Fitbit Inc (NYSE:FIT) just reported revenue of $394 million, GAAP net loss per share of ($0.01), non-GAAP net income per share of $0.04, GAAP net loss of $2 million, non-GAAP net income of $10 million, cash flow from operations of $59 million and free cash flow of $47 million for its third quarter of 2018.


Upset Special, Baby!

That represents promising Q3 results. And the guidance was also quite nice. In fact, the beaten down stock posted its first year/year increase in revenue since 3Q16, bolstered by a boost in smartwatch sales, which drove average selling prices higher. The company is now the second largest seller of smartwatches, behind only Apple (AAPL), despite the company only entering the market a little more than a year ago.

All of that sounds great. We aren’t arguing. We just want to express how we would contextualize this situation: a nice trading pop based on surprisingly good execution.

And the move to take advantage of the healthcare niche is also a great job by management. Again, we aren’t arguing with the strong execution.

It’s a bit like watching a surprisingly good run by a small state technical school in the NCAA tournament. Maybe they even make it to the sweet sixteen. Maybe they even go all the way. But a thorough ramp into shares by big money – one that pushes the stock into a strong premium state and holds it – is just as unlikely as Vegas bookies making a line that calls Florida Gulf Coast University a favorite against Duke in the Great Eight.

It isn’t going to happen. They won’t get the benefit of the doubt because the odds are so stacked against the model.

Perhaps if FGCU wins back-to-back national championships, they might start to get favored here and there. But, until that point, they will be underdogs. And, in stock market terms, an underdog is a stock that gets faded no matter how the headlines roll out.

That said, for now, the stock is bolting higher, breaking above its 200-day MA with major resistance above at the $7/share mark.

We always root for the underdog. But that doesn’t mean we are going to bet on them.

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