Shares of activity band maker Fitbit Inc (NYSE:FIT) fell an incredible 37% in November according to data provided by S&P Global Market Intelligence after the company reported earnings and guidance that failed to inspire investors.
Revenue jumped 23% to $503.8 million in the third quarter, but net income dropped from $45.8 million a year ago to $26.1 million. And full-year guidance was reduced to $725 million to $750 million in revenue from a previous estimate of $985 million. Earnings per share are now only expected to be $0.55 to $0.59, a drop from a previous guidance of $1.12 to $1.24.
The challenge Fitbit faces is that its improving sales aren't keeping up with a surge in operating expenses. Last quarter, operating expenses rose 52.4% to $196.2 million, far above the growth in sales. And that will naturally result in a worse bottom line if the growth in expenses isn't reversed.
High growth companies often have a problem determining how fast they're going to grow and how quickly to increase operating expenses to meet that growth. So when they hit anything resembling a rough patch it's easy for income to drop dramatically because management overestimated growth. That's what is hurting Fitbit today.
Long-term, it's difficult to see exactly where the company is headed. There seems to be a place in the market for Fitbit's devices, but there may not be a lot of growth left in the near term. And the balance sheet looks strong with $672 million in cash and marketable securities and no debt. That said, until management proves it can keep costs under control and return the bottom line to growth, this is a stock I would be very cautious betting big on given the big name competition in smart devices today.