Fitbit’s latest earnings results surpassed expectations, but the top and bottom line beats weren’t enough to overcome the news of a follow-on offering and the early release of a lockup on millions of insider-owned shares. The stock slumped during regular trading hours today, falling by as much as 6.69% to $38.07 per share in heavy trading. As of 2:45 p.m. Eastern, more than 11 million shares had changed hands, compared to the daily average volume of 3.2 million shares.
A “curiously timed” offering
Clearly the big story on Fitbit today is the follow-on offering and lockup expiration rather than last night’s earnings report. The company said it plans to do a follow-on offering of 7 million more shares and that some shareholders are proposing selling another 14 million shares. Pacific Crest Securities analyst Brad Erickson noted that the offering is creating volatility and termed it as “curiously timed.”
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Along with last night’s earnings report, Fitbit also said Morgan Stanley released the lockup restriction on insider-owned shares early, making about 2.3 million additional shares eligible for trading on Wednesday. The rest of the locked-up shares will become available for trading on Dec. 14.
Fitbit price target upped by DB
Fitbit reported adjusted earnings of 24 cents per share and revenue of $409.3 million, compared to the consensus estimates of 10 cents per share and $359.2 million. Management’s guidance was also quite a bit ahead of consensus estimates, leaving very little for analysts to complain about. Analysts generally agree that the company looks well-positioned heading into the holiday shopping quarter.
Deutsche Bank analyst Ross Sandler and his team note that Asia Pacific revenue doubled and revenue from Europe, the Middle East, and Africa climbed 24% sequentially as strength in international markets offset the usual seasonal slowness in the U.S. Fitbit sold nearly 5 million units, giving it almost 90% of the fitness wearable market. They maintain their Buy rating and raised their target price for Fitbit slightly from $50 to $52 per share.
Morgan Stanley analyst Katy Huberty and her team were positive on Fitbit’s international strength and expect to see growth continue next year. She said the company’s performance in China and India offered big surprises to the upside and added that marketing has been a main driver of Fitbit’s international growth.
Comparing Fitbit with GoPro?
The Deutsche Bank team thinks some of the negative sentiment on Fitbit might be due to parallels being drawn with GoPro but believe that Fitbit “can earn its way to a much higher market cap” as the attach rate for smartphone users rises to 10% in Western markets. The Deutsche Bank team believes investors may be worrying about a “GPRO implosion” and believe this is rather understandable although they disagree with the view.
They say that there are many differences between GoPro and Fitbit in terms of culture, financial performance, products, and industry. For example, they note that Fitbit’s inventory climbed by more than 350% year over year and almost 50%% sequentially as the company prepared for the holiday shopping season.
Erickson of Pacific Crest also noted that investors may be worried about Fitbit being the next GoPro and highlighted five major differences between the two companies. One is that Fitbit has a larger addressable market, and the second is that it has achieved its revenue beats without releasing any new products. The third is that there’s actually competition in the fitness wearable market, unlike the action camera market were competition is nearly nonexistent.
Fourth, he said Fitbit management is allowing for margin leverage, and fifth, he said, “There are other businesses that actually produce real revenue.”
Fitbit fills inventory channels early
They added that increases in production capacity enabled it to fill its most important channels before peak season, which it couldn’t do last year and will probably will put it ahead of most of its competitors this year. Huberty agrees with Sandler in that Fitbit’s ability to fill its inventory channels early puts it in an attractive position going into the holidays. She has an Overweight rating and $59 per share price target on the company.
In the long term, Sandler thinks the company will evolve from a company with only three or four wrist-based fitness wearables into one with a broader fitness brand covering multiple categories and types of devices.
Fitbit highlights corporate customers
In last night’s earnings call, Fitbit management highlighted how they are partnering with corporate clients. The company has signed on 70 companies in the Fortune 500 as corporate wellness customers. Erickson of Pacific Crest estimates the opportunity at 150 million units or more and think this area is “highly underpenetrated.”
Although corporate wellness is still less than 10% of Fitbit’s revenue because of how strong its consumer business is, he sees a significant opportunity in this area over the long term. The analyst continues to rate Fitbit at Overweight with a $47 per share price target based on continued robust demand for its wearables.