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The past few months have been a turbulent ride for Fitbit (NASDAQ: FIT) and its investors. Despite Fitbit’s impressive sales and earnings growth over the past several quarters, the market remains unimpressed. Shares of the fitness wearable maker are down a whopping 35% just since the beginning of 2016.
Clearly, investors are deeply concerned about the company’s future growth potential. Fitbit’s wearables are popular with consumers, but the market is panicking about the threat of competition from the likes of Apple (NASDAQ: AAPL) and others entering the space and stealing market share.
Fitbit is hoping that its newest model, the Fitbit Blaze, will be the cure for what ails the company.
Fitbit Blazes Ahead
In an effort to get investors excited again, Fitbit points to its major new product, the Blaze smartwatch. The Fitbit Blaze is an attempt to directly take on Apple and others in the smartwatch category.
The company says Fitbit Blaze will sport a battery that lasts five days on a single charge. This would be a significant advantage over the Apple Watch, which currently has a battery lasting only about 18 hours.
Furthermore, the Fitbit Blaze has a variety of other features that demonstrate a meaningful step forward in its technology. The early Fitbit bands had fairly simple interfaces with only a few functions. The Blaze has a full-color screen, can take calls and also can play music.
The Fitbit Blaze will cost $199 and is set to launch in March. Analysts fear that the price may be too high, considering the Blaze does not offer access to third-party apps, while many competitors’ models do.
Investors appear worried that instead of making improvements to Fitbit’s existing products, including the Charge and the Charge HR, the company is getting ahead of itself in directly challenging the most valuable company on the planet.
Moreover, Fitbit is now entering uncharted territory. The company built up its business and reputation with a focus on fitness devices. Smartwatches are a an entirely different category, in which functionality and apps are key, and fitness a secondary concern.
Fitbit’s Fine Fundamentals
The pervasive negativity over Fitbit is a contrast with how the company itself has performed over the past several months. Over the first three quarters of its fiscal year, Fitbit’s revenue nearly quadrupled, from $375 million in the comparable 2014 period, to $1.1 billion.
Fitbit sold 13 million devices in the first nine months of 2015, up from 5.6 million in the same period the year prior. Furthermore, Fitbit’s net income rose 20% in that time. This implies that consumers still view Fitbit products favorably, and the brand is latching on. And, it’s worth noting that no individual company has yet claimed a stranglehold on the smartwatch category, so Fitbit has a good chance of gaining a foothold in the market.
Still, investors appear much less focused on what Fitbit achieved in the past, and instead are highly worried about the future threats from competition.
In response, Fitbit management tried to stress at the product unveiling that the Fitbit Blaze represents a one-of-a-kind blend between the two worlds, calling it a “smart fitness watch.” But investors remain unconvinced.
A Strategic Catalyst?
The fall of Fitbit stock is nothing short of stunning. The stock trades at $19, below its initial public offering price of $20. In contrast, Fitbit was trading north of $50 last summer.
After such a huge drop, Fitbit stock now looks like a value play. Shares trade for just 16 times forward earnings, which is a valuation multiple on par with the S&P 500. But investors don’t buy Fitbit for value. This is a growth stock, and in order for growth investors to come back, the company needs a catalyst.
The Blaze might be just the catalyst Fitbit needs. If the Blaze sells well, it can prove to the market that Fitbit has a place with Apple and other smartwatch manufacturers.
DISCLOSURE: Bob Ciura personally owns shares of Apple (NASDAQ: AAPL).
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