Shares of Fitbit (NYSE:FIT) slumped on Thursday after the stock was downgraded to underperform by an analyst at Pacific Crest. At 3 p.m. EDT, shares were down about 10%.
According the Pacific Crest analyst Brad Erickson, the Charge 2, Fitbit's latest fitness band, is off to a slow start. Erickson pointed to accumulating inventory in the channel and a rate of sell-through below initial levels for Fitbit's Blaze and Alta fitness bands. Erickson lowered his estimates for the fourth quarter and 2017 based on these issues.
Another piece of news that could be rattling Fitbit shares: Health insurance company Aetna announced that it was subsidizing Apple Watches for select employers and customers during the healthcare enrollment season. This move by Aetna is a vote of confidence in the Apple Watch, and potentially a major negative for Fitbit.
Fitbit faces the dual problems of convincing its customers to upgrade and fighting off competition from more fully featured devices like the Apple Watch. The Charge 2 brought improvements compared to the original Charge, but it may not be enough to produce growth for the company.
Weak initial sales of the Charge 2 may not be a strong predictor of holiday sales, so investors should take this analyst downgrade with a grain of salt. Having said that, Fitbit will need to prove during this holiday season that it can sustain its growth. The company has been spending heavily on both research and development and sales and marketing in recent quarters, wiping out much of its profits in an effort to drive product development. If Fitbit can't produce growth after all that spending, the stock could tumble even further.
As always, analyst upgrades and downgrades don't replace doing your own research. But the points raised by Erickson should be concerning to Fitbit investors nonetheless.
Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.