Please ensure Javascript is enabled for purposes of website accessibility

Why Fitbit Stock Tanked More Than 10% Today

By Rich Smith - Updated Dec 15, 2017 at 11:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An analyst says Fitbit needs 40% margins and 15% growth to profit, but it has neither.

What happened

Shares of wearable fitness tracker company Fitbit (FIT) dropped more than 11% in early Friday trading, before clawing their way back to "only" an 8.5% loss as of 10:40 a.m. EST. You can thank investment banker Stifel Nicolaus for this.

Early this morning, Stifel Nicolaus downgraded Fitbit stock from hold to sell and cast cold water on faint hopes that the company can turn profitable again.

Two wrists wearing fitness trackers

Image source: Getty Images.

So what

What made the analyst say this? Here's the thesis in a nutshell: According to Stifel Nicolaus, "at mid-40s gross margin," for Fitbit to return to a "breakeven operating margin would necessitate a return to mid-teens revenue growth in 2018."

But here's the thing (actually, two things). Fitbit isn't earning "mid-40s gross margin." Rather, S&P Global Market Intelligence data shows that margins have been in the low 40s for the past two quarters, while its trailing-12-month gross profit margin is averaging closer to 36%.

As for revenue growth, we're seeing none of it this year. Instead, sales are down 35% year to date. True, growth is expected to return next year, but most analysts see Fitbit sales growing only about 6% in 2018 and only 5% in 2019. That's a quite a ways short of "mid-teens revenue growth."

Now what

With no profits and no free cash flow to its credit, Stifel Nicolaus sees Fitbit stock as worth no more than $6 a share -- 12% below what it cost before trading began this morning. At one point, it was down almost all the way to Stifel's price target before rebounding.

But unless Fitbit moves fast to prove Stifel Nicolaus wrong -- either by showing better-than-expected sales growth, improved profit margins, or both -- this rebound won't last for long.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Fitbit, Inc. Stock Quote
Fitbit, Inc.
FIT

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.