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Fitbit Doesn't Need a Buyout to Bounce Back

By Rick Munarriz – Nov 15, 2016 at 4:06AM

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A bogus Shanghai-based company isn't buying Fitbit, but that doesn't mean that someone else won't take a bite.

Image source: Fitbit.

There won't be wedding bells for Fitbit (FIT) in the near term. Shares briefly moved higher last week after a regulatory filing by a Chinese company claimed to have made an offer to snap up the leading maker of wearable fitness gadgetry for $12.50 per share.

It wasn't real. CNBC and Mizuho Securities analyst Betty Chen quickly concluded that ABM Capital was a fake company. Its corporate address didn't exist, and its listed phone number was disconnected. Fitbit would go on to announce that it never received the unsolicited offer.

Scammers hoping to make a quick buck on the fake news probably didn't make the killing that they were hoping to score. The stock was halted, and never traded more than 8% higher on the day before giving back most of the day's speculative gains. That may seem like a big move for someone playing derivatives, but the cruel or delicious irony is that better gains were left to be had. The stock has gone on to close higher for three consecutive trading days since the bogus regulatory filing was exposed.

Swinging single

Buyout chatter seems be at its loudest when a niche leader is out of favor, and that's Fitbit these days. The stock shed more than a third of its value earlier this month after posting disappointing guidance for the holiday quarter in its latest financial report.

Fitbit's outlook calls for $725 million to $750 million in revenue, just 2% to 5% ahead of the prior year's showing. It's still growth, but Fitbit's growth has been decelerating at an alarming pace. We've seen year-over-year top-line growth go from 50% in the first quarter to 47% in the second quarter and 23% in the third quarter. Now we're eyeing growth in the low single digits during for the current quarter.

Fitbit introduced two new products in September, and a lot was riding on the success of Fitbit's Charge 2 and Flex 2 to help grow sales. Things aren't apparently playing out that way, and that's only the first level of bad news. Margins have taken a hit this year, and the profit of $0.14 to $0.18 a share that it's targeting for the fourth quarter suggests even more margin contraction.

This isn't Fitbit at its best, and it's why the stock that traded north of $50 just weeks after its IPO last year has fallen into the single digits. However, the Fitbit brand and its continued dominance in the wearable category will likely make it a popular candidate in buyout chatter in the future. Last week's buzz wasn't real, but there will be no shortage of tech giants, athletic footwear makers, and health fitness specialists that may be interested in Fitbit at the right price. The bullish hope has to be that Fitbit earns its turnaround with compelling releases in the year ahead, but the brand's appeal should keep a floor on the stock as long as it remains profitable.

Rick Munarriz owns shares of Fitbit. The Motley Fool owns shares of and recommends Fitbit. 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.

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