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Is Fitbit Stock a Buy Below $3?

By Evan Niu, CFA - Aug 15, 2019 at 9:00PM

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Shares look cheap by some valuation metrics, but looks can be deceiving.

Fitbit (FIT) stock fell below $3 per share today, setting record lows in its four years as a public company. Its market cap is now well under $1 billion, closing at approximately $750 million. The wearables market is booming, with market researcher IDC recently boosting its forecast for 2019. IDC now expects global shipments to reach 222.9 million this year. Investors looking to bet on that boom might consider investing in Fitbit, which is a clear leader in the fitness tracker category.

Here's why Fitbit might not be the best wearables play.

Woman wearing a Versa on an outdoor run

The Versa was a hit. The Versa Lite? Not so much. Image source: Fitbit.

Fitbit doesn't have a lot of promising prospects

Fitbit hit a rough patch in 2017 following the release of Apple (AAPL 3.19%) Watch, which catalyzed the broader trend of smartwatches cannibalizing fitness trackers. After a string of quarterly losses, Fitbit was able to turn a profit in late 2018, although that was mostly attributable to cost cuts on flat sales. For a while, it looked as if the company was putting together a turnaround, transitioning its focus from fitness trackers to smartwatches like the Versa, Fitbit's second smartwatch after the high-end Ionic bombed.

FIT EPS Diluted (Quarterly) Chart

FIT EPS Diluted (Quarterly) data by YCharts.

However, Fitbit's second-quarter earnings release demonstrated just how fickle the market for consumer gadgets can be. The Versa Lite, positioned as a cheaper variant of the Versa, flopped, leading Fitbit to cut its outlook for 2019. The inconsistent profitability also means it's hard to say Fitbit shares have become cheap, since the company does not have a P/E ratio. In terms of P/S, the company's valuation has also hit fresh lows, with shares now trading under 0.5 times sales.

FIT PS Ratio (TTM) Chart

FIT PS Ratio (TTM) data by YCharts.

The real question for investors is whether Fitbit represents a screaming bargain or if current share prices accurately reflect the company's prospects. It's clear that Fitbit doesn't quite have the product prowess to consistently release hit devices. In contrast, Apple can count on its legions of loyal customers to regularly buy Apple Watches.

On top of that, Fitbit has to navigate the increasingly geopolitical risks associated with President Trump's trade war. The company has been able to escape unscathed thus far, but the new round of tariffs (some categories have been delayed) could potentially have an adverse impact, Fitbit warns in regulatory filings.

Fitbit has tried to diversify its business into subscription-based services but has made virtually no progress over the years. Subscription-based services still represent less than 1% of total revenue.

At the end of the day, Fitbit doesn't have a lot of prospects on the horizon that should give investors much confidence. Sales are faltering, competition is intensifying, the digital health platform remains inchoate, and consumer preferences shift rapidly. There are better wearables plays out there.

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