The Fitbit app. Image source: fitbit.com.
What: Shares of Fitbit (FIT +0.00%) plunged 29.2% in November, according to S&P Capital I.Q. data.
So what: The manufacturer of wearable fitness devices released third-quarter 2015 earnings on Nov. 2, its second quarterly earnings report since going public in June. Fitbit unveiled extremely impressive revenue growth, with revenue of $409.3 million representing a 168% increase over Q3 2014. Net income declined to $45.8 million, in comparison with a prior-year profit of $68.9 million, which was not unexpected, as the company had already forecast a lower gross margin for the period.
Yet the wearables pioneer still slid 8.5% during the trading session following the earnings release. Fitbit announced alongside earnings that it was planning a secondary offering of 7 million shares, with certain existing stockholders slated to sell an additional 14 million shares. The company also disclosed that its underwriter would lift trading restrictions on 2.3 million shares held by employee consultants, the sale of which were originally restricted until early 2016.
Later in the month, on Nov. 13, Fitbit filed a revised statement with the SEC, lowering its total offering to 3 million shares, at a price of $29, which was beneath the previous day's close of $31.68. The less ambitious offering was in response to difficult market conditions for stock offerings during November, and perhaps predictably, shares finished down 12% on the 13th.
There are multiple reasons for Fitbit advocates to wring their hands over this follow-on offering. First, secondary offerings which almost immediately succeed initial public offerings are a sign that a company has miscalculated its capital needs. Fitbit's filing indicates that the net proceeds from the new share issuance will be used primarily for "working capital and other general corporate purposes, including research and development and sales and marketing activities, general and administrative matters, and capital expenditures." In other words, the uses are similar to the company's initial funding needs.
Another worry for existing shareholders is, of course, dilution. Those who bought into the IPO can't be happy with the company's rapid return to the capital markets, as the second issuance has essentially decreased previous investors' share of company earnings.
Now what: Fitbit's fourth-quarter earnings report, due in early February, will perhaps brighten the "FIT" symbol's prospects for next year. Management raised full year revenue guidance on Nov. 2, from a range of $1.6 billion to $1.7 billion, to a new range of $1.77 billion to $1.80 billion, but this was lost in the overwhelming focus on the organization's secondary offering. Closing out the holiday season with momentum, and exhibiting vigorous top-line expansion, would go a long way toward recapturing investors' attention as the manufacturer moves into 2016.
