Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Fitbit (NYSE:FIT) investors, prepare to experience an attack of whiplash.
Item 1: Your company just crushed its fourth-quarter earnings report, posting twice as much profit as analysts had predicted.
Item 2: Fitbit then proceeded to shoot itself in the foot, issuing weak guidance for the current quarter.
Item 3: Investors are selling the stock off hard -- down nearly 14% in early trading.
Item 4: Ace stock picker DA Davidson -- ranked in the top 10% of analysts we track -- just upgraded it.
What Fitbit said
Let's begin with the basics -- Fitbit's earnings report.
For fiscal Q4 2018, Fitbit reported last night that active users of its wearable fitness trackers (step counters) increased by 9% year over year. Sales of $571.2 million hardly grew at all in comparison to last year's Q4, but the company earned a GAAP profit of $0.06 per share (versus last year's net loss), and reported a non-GAAP profit of $0.14 per share, which was double what analysts were looking for.
These results were admittedly pretty mixed. For one thing, Fitbit's GAAP profit was way below the non-GAAP number everyone is focusing on today. For another, sales showed almost no growth.
Nevertheless, Q4 results showed a marked improvement over Fitbit's performance earlier in the year, when sales declined versus 2017 figures, and both GAAP and non-GAAP profits were negative.
Check out the latest Fitbit earnings call transcript.
What Fitbit said will happen next
Of course, investors are selling off Fitbit stock today, and that tells you that there was probably something worse than merely mixed numbers buried in the company's report. The truly bad news, it turns out, was guidance.
Telling investors what to expect now that 2019 has begun forming up, Fitbit issued some pretty dire warnings. After earning a profit in Q4, the company is about to dive right back into negative territory in Q1. Management thinks sales will grow only 4% or so, to somewhere between $250 million and $268 million. (Wall Street wanted Fitbit to hit that higher number, and won't be satisfied with less.) Management further warned that it will post a non-GAAP loss in Q1 of $0.22 to $0.24 per share. (Analysts expected no more than $0.16 per share in losses, and thus will again be disappointed.)
It gets worse.
For the full year, Fitbit expects sales to grow only 1% to 4% -- so business will slow after Q1 -- to a range of $1.52 billion to $1.58 billion. At the midpoint, this number, too, will miss analysts' expectations for $1.57 billion in full-year revenue.
Oh, and gross margins will decline "modestly for the full year to approximately 40%," said Fitbit CFO Ron Kisling, potentially negating any earnings growth from the barely rising sales.
What DA Davidson says about that
So...sheesh! Way to rip the bandage off, Fitbit! No matter how good the company's Q4 2018 profit was, guidance for barely growing sales and declining margins was tailor-made to spark a sell-off today. And yet, investment banker DA Davidson is taking the opposite course, and upgrading Fitbit shares.
Despite the forecast for weak sales growth, it seems, Davidson is happy to hear that "the improvements management has made to the company's operating results" are being paired with a return to at least some sales growth, as the analyst explains in a note covered on StreetInsider.com (subscription required). Davidson adds that it is "pleased by the progress [Fitbit has made] in its healthcare services efforts," where sales grew 8% in 2018.
Valuing Fitbit stock
Of course, what really seems to have gotten Davidson excited this morning is the fact that Fitbit stock is "trading down nearly 15% (to $5.85) in after-hours trading." When you consider that Fitbit has $723 million worth of cash, cash equivalents, and marketable securities on its balance sheet -- $2.78 per share in net cash, says Davidson -- and no long-term debt to speak of, Fitbit at less than $6 a share is basically a stock composed of 50% cash.
This makes the stock's enterprise value roughly $750 million, and -- growth or no growth -- with Fitbit currently generating new cash profits at the rate of $60 million a year, that gives the stock an enterprise value-to-free-cash-flow ratio of 12.5. Davidson calls this "risk/reward" balance "favorable."
Despite the weak guidance, I can't say I disagree with that assessment one bit.