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Jan 30, 2017

S3 BLACKLIGHT: Fitbit Short Sellers Counting Their Profits Along With Their Steps

Fitbit Inc.’s (FIT US) stock price is down over 12% today on news that their holiday sales season was weaker than expected and 4th quarter sales would fall in the $572-$580 million range, over 20% less than their initial guidance of $725-$750 million. Management also guided expected EPS lower with losses expected to be $0.51-$0.56/share versus their initial guidance of a profit of $0.14-$0.18/share. Official 4th quarter results will be released in February.

In response, Fitbit will be laying off 6% of its workforce in an attempt to curb operating costs. Although Fitbit remains the market leader in the wearable technology sector it is feeling stiff competition from Apple and cheaper Chinese alternatives such as Xiaomi.

Short sellers have been very active in Fitbit with short interest averaging almost $600 million in 2016. Short activity was so robust that borrow rates averaged 6.81% fee in 2016 with short sellers paying almost $39.5 million in stock borrow costs throughout the year. But this was money well spent as Fitbit’s stock price fell 75.26% in 2016 and short sellers were able to make $816.7 million in mark to market P\L in 2016. This P\L does not include revenues or losses incurred from intraday trading. On a net basis, Fitbit short sellers made $777.4 million in mark to market P\L net of stock borrow financing, for a 131% annual return on their average short positions.

With today’s news, 2017 is starting off well for Fitbit short sellers. Fitbit short interest was decreasing at the end of 2016 with short interest down to $324 million by year end. But short interest has reversed course and is up 31% in January, with balances up to $424 million. Including today’s share price drop, Fitbit short sellers have incurred $505 thousand in stock borrow financing costs to make just over $73.5 million in mark to market P\L. With a net of financing profit of $73 million in January short sellers have made an almost 18% return on their short balances in just under a month.

With Fitbit’s stock price already below $7/share and short sellers having made 131% in 2016 and 18% so far in January 2017 shorts may be quick to cover their positions and lock in their profits if Fitbit’s stock price plateaus or reverses course. Although there is stock available to borrow for more short selling, borrow inventory is starting to get tight again and stock borrow rates will begin to get more expensive shortly. It might not take much of a stock price or borrow rate move to spook short sellers into covering their already profitable holdings. It might not take much more than a hug to start a true short squeeze in Fitbit.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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