Fitbit Inc (FIT US) reported 2nd quarter earnings of $0.12/share that beat estimates by a penny and also maintained revenue guidance of $2.5 billion and EPS of $1.12-$1.24/share. Fitbit’s stock price responded by rallying 13.45% to $14.93, although it is still down 49.54% year to date.
Fitbit is still the top producer in the wearable electronics market with 24.5% of the market, down from 32.6% last year. Apple (AAPL US), Xiaomi (private co.), LG (066570 KS), Garmin (GRMN US) and Samsung (005930 KS) have crowded the market and threaten domestic growth. In order to offset this competition Fitbit is now aggressively expanding into the European and Asian markets to create brand awareness and an early marketing footprint for their new products. Fitbit has even teamed up with China’s Alibaba to sell their wearable tech through their marketing and sales channels.
The biggest fear Fitbit investors have is competition from tech heavies Apple and Samsung, but unlike the smartphone market where economies of scale make it difficult for small upstart manufacturers to become profitable, a smaller company can have a profitable brand in the wearable tech market. If Fitbit can continue bringing out successful new products like its Alta and Blaze, which made up over 50% of its 2nd quarter revenues, without ballooning R&D costs, margins and EPS can continue to grow. But with such a large breadth of competitors and an ever updating slate of competitive products, sustainable product success is not likely. Customers are swayed to the next new shiny product launch and unless a manufacturer has a dedicated loyal product following R&D must continually be fed in order to increase or just sustain revenue levels. Additionally, unlike most large electronics manufacturers, Fitbit is a one product line wonder and does not have differentiated revenue streams. If the popularity of activity tracking wearables wanes, Fitbit does not have a secondary or tertiary product to fall back on.
FIT short interest peaked in early December 2015 at $863 million but has been easing after the stock hit its 1st quarter low of $12.15 in February. Short interest dropped below $450 million in early June and by July we began seeing short crowding spikes in the S3 Crowding Indicator, a measure of the magnitude of real time short activity relative to market cap and float. Shorts have increased their positions by 57% since early June and short interest is now up to $706 million. Short sellers used yesterday’s 13% price jump as an attractive entry point as we saw a major crowding spike yesterday and $50 million of new short sales. Stock borrow rates have risen to 2.75% fee and with borrow availability starting to get tighter, we should be seeing rates rising even more, especially when we start using up the last 10% of borrowable stock.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
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