Fitbit Inc Tanks And Short-Sellers Rejoice After Negative Preannouncement

Fitbit shares plummeted today that it is cutting jobs and warned that its fourth quarter earnings report will disappoint. Analysts cut their price targets as a result, and short-sellers started racking up profits on their bearish bets. The stock touched an all-time low earlier this month and could be on track for yet another new low very soon.

Fitbit releases negative preannouncement

Fitbit stock plunged by about 15% on Monday to close at $6.06. The company said in a press release today that it will cut 110 jobs in various departments, trimming its global workforce by about 6%. The fitness wearable maker expects a charge of about $4 million in connection with the job cuts; it intends to record that cut in the first quarter.

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Fitbit also said today that it sold about 6.5 million devices in the December quarter and expects to report sales of $572 million to $580 million. That’s a huge drop from its previous outlook of $720 million to $750 million. The company also said it expects about 17% annual sales growth, down from the previously provided range of 25% to 26%. Fitbit projects a gross margin that’s much worse than the 46% outlook due to excess inventory and charges. Further, the company expects to post losses of 51 cents to 56 cents per share, while it was previously expecting earnings of 14 cents to 18 cents per share.

For this year, the fitness wearables maker expects $1.5 billion to $1.7 billion in revenue, marking a 22% to 31% year over year decline, assuming stabilization in the second half of this year. Consensus stands at $2.4 billion, however. The company expects full-year losses of 22 cents to 44 cents per share, compared to the consensus of 61 cents per share in earnings.

Fitbit stock price target cut

JPMorgan analyst Sherri Scribner said in a report on Monday that she has slashed her price target for Fitbit stock from $9 to $6 per share due to the negative preannouncement. She also maintained her Hold rating and said she has switched to a price-to-sales valuation due to the lack of clarity on the outlook for this year.

Mizuho Securities analyst Betty Chen also cut her target on Fitbit stock, moving it from $9 to $6.50 per share. She expects pressure on the company’s average selling prices and falling demand for its products. She also warned that the U.S. now appears to be a saturated one for the fitness wearable market.

Short-sellers cash in on positions

Data from financial analytics firm S3 Partners shows that short interest in the stock has been high and averaged nearly $600 million last year. In fact, the firm said that borrowing rates averaged around 6.81% in fees because of “robust” shorting activity in the name. Short-sellers paid almost $39.5 million in stock borrow costs last year, the firm said.

It turned out to be a wise investment, however, as Fitbit stock plunged more than 75% last year, enabling short-sellers to rake in $816.7 million in market to market P/L during 2016, not including anything gained or lost from intraday trading. S3 Partners said that short-sellers collected $777.4 million in mark to market P/L net of stock borrow financing, managing an annual return of 131% on their average short positions.

The firm adds that short interest in Fitbit stock fell to $324 million by the end of 2016, but just this month, it has surged 31% to $424 million. There could be some volatility in short interest in the near term.

“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,” S3 Partners Research Head Ihor Dusaniwsky said in an email. “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.”