Fitbit shares have been tumbling since earlier this month when the company announced another offering, but the stock finally bounced today. Shares had plunged by more than 30% in just two weeks. SunTrust Robinson Humphrey analyst Robert Peck cut his price target for the wearables manufacturer because he thinks a lower multiple is warranted.
However, a post from InvestorPlace Assistant Editor John Divine suggests that the recent pullback presents a buying opportunity because he likes the current valuation and expects a strong holiday quarter from the company.
Fitbit price target to $48
Peck said in his report dated Nov. 16 that he has trimmed his multiple for enterprise value to EBITDA from 21 times to 19 times 2017 estimates. This brings his price target from $52 to $48 per share, although he remains Buy-rated on Fitbit. He also made these adjustments to account for dilution due to the new 17 million share offering, including 3 million primary shares.
The SunTrust analyst said investors have been asking about the driver of Fitbit’s stock price plunge, and he thinks it’s more about macro trends and concerns about the broader wearable industry rather than any change in the company’s fundamentals. He said disappointing updates from some of the most important traditional retailers and GoPro’s disappointing results are likely weighing on Fitbit’s share price, as are October’s sales data and Fossil’s acquisition of Misfit, which has resulted in concerns about competition.
Further concerns for Fitbit, according to Peck, include markdowns of private investments by mutual funds and Square’s upcoming initial public offering price range, which bears a lower valuation than the last round of fundraising the firm did. He also thinks the markets are concerned about the Federal Reserve’s plans to raise interest rates.
Fitbit’s fundamentals remain strong
The analyst noted that during Fitbit’s roadshow, investors talked about a number of key fundamental drivers, which he doesn’t see as being changed. For example, he said that thus far, the Apple Watch appears to have had a “negligible impact” on Fitbit’s product sales. Also he said gross margins have remained stable, and the company has ramped inventory in expectation of a “big” holiday quarter.
Also there remain possibilities of mergers or acquisitions being on the horizon, and Fitbit said on its earnings call that it has signed new corporate wellness partners, further boosting its sales.
Fitbit’s offering was a good decision
Despite Wall Street’s bearish reaction to Fitbit’s offering, Peck thinks it was a wise decision. The company has about $650 million in cash and $250 million available on a revolving credit facility. Fitbit sold 3 million shares (a reduction from the previous plan of 7 million), and venture capitalists sold about 10 million shares.
The analyst noted that through the offering, Fitbit gained $80 million it could use for mergers and acquisitions. Also top shareholders are locked up for another 90 days, and the float increased 40% thanks to the offering. Further, he said new long term shareholders have an opportunity to get into Fitbit, and the offering eases pressure that would have built up ahead of the expiration on the lockup of millions of insider-owned shares next month.