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Call me a glutton for punishment. Back in September, I decided to put a hefty chunk of my family's retirement savings behind a hot stock that had fallen on tough times. What did I like about the company?
- Revolutionary vision: The goal is, "help[ing] people capture and share their lives' most meaningful experiences with others." Such a vision gives the company optionality -- the ability to pursue many different futures.
- Leadership: The company was led by a founder/CEO who owned a whopping 89% of Class B shares.
- Culture: It had high marks via Glassdoor reviews -- an important proxy in my decision-making process.
- Growth: Revenue had just shown growth of over 70% in the previous quarter.
- Balance Sheet: There was no long-term debt to speak of, versus over $300 million in cash and equivalents.
That stock was GoPro (GPRO 1.33%). And since that piece was published, the stock has lost over 60% of its value. I haven't sold my shares of GoPro and am waiting to see how things play out. But it's clear that this has been a losing investment thus far.
This month's top stock is...
I share the information above as a cautionary tale. All of the characteristics that drew me to GoPro are present in this month's pick. I wouldn't be surprised, then, to see it have a very volatile future.
That stock is wearable-tech company Fitbit (FIT +0.00%). Using the framework above, here's why I'm a fan:
- Revolutionary vision: Fitbit's mission is to, "empower and inspire you to live a healthier, more active life." While many non-Fitbit users thinks this just means heart rate and GPS tracking, it also includes monitoring your sleep patterns and calendar notifications.
- Leadership: Founders James Park and Eric Friedman are currently Fitbit's CEO and CTO, respectively. Along with the rest of the company's leadership team, insiders own 5% of Class A shares and 98% of Class B shares.
- Culture: According to Glassdoor, Fitbit's employees give the company an average rating of 4.0 out of 5.0. A full 95% approve of the job Park is doing as CEO, 85% would recommend working at the company to a friend, and 85% have a positive outlook for the company's prospects.
- Growth: Heading into 2016, Fitbit had grown revenue and net income by 150% and 220%, respectively.
- Balance sheet: Fitbit has nearly $800 million in cash on its balance sheet and no long-term debt.
But I'm still only making a small purchase. Here's why...
Given all of those positives, it might seem like it's time to back up the truck. But that's not the approach I'm going to be using. In fact, I'll be investing less than 1% of my family's real-life holdings when Foolish trading rules allow me to buy shares.
My reticence boils down to three words: Sustainable. Competitive. Advantage.
Like GoPro, one of Fitbit's biggest advantages is that it's the first-mover and top player in a growing industry. But the problem is that neither business has much of a moat around it. Analysts have opined for some time that people could end up turning their Apple iPhones into cameras that essentially do the same thing as a GoPro.
While I think that seems a little ridiculous right now -- who would want to attach an iPhone to their helmet while skiing the Alps? -- the same principle applies: This technology could become commoditized.
Like GoPro, many believe Apple could ultimately be a FitBit killer as well. The company's Apple Watch is naturally positioned to have the same functionality as a FitBit device -- and much more. And there are others that want in on the game, too: Under Armour has its HealthBox, and Garmin has the Jawbone, to name a few.
Given this, why would I wager my hard-earned money at all? I have two reasons.
First, FitBit's stock is very cheap right now. It's trading for just 15 times trailing earnings, 17 times free cash flow, and 11 times future earnings. While earnings growth has slowed, these are very reasonable prices given the company's track record. I think this provides some downside protection and also makes the company a prime takeover target; if Apple purchased FitBit for just $4 billion -- a 33% premium -- it would be a drop in Apple's cash-rich bucket.
Secondly, with its first-mover status, I believe FitBit has the best opportunity to create an ecosystem around its devices. Unlike GoPro, FitBit routinely comes out with new models, which allows it to learn from its mistakes and make changes on the fly. It also recognizes that being able to create high switching costs could keep customers around. In particular, I believe FitBit's acquisition of Coin -- a mobile payment app -- is a move toward integrating a FitBit more deeply within the user's daily routine.
Only time will tell how this turns out. The key for the company now is to focus on (1) learning as much as possible from each product iteration, and (2) creating an ecosystem that differentiates FitBit from the competition.
