Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

The start of baseball season is approaching, which means it's time to break out a sports metaphor: Fitbit is like chronically corpulent Red Sox player Pablo Sandoval. They are both fitter than they appear at first glance.

Shares of the maker of fitness tracking bands and smartwatches were getting crushed on Tuesday on the heels of a disappointing earnings forecast. The Fitbit battering fits the recent market pessimism about any company that makes consumer gadgets and doesn't rhyme with "Snapple." Fellow consumer hardware company GoPro has had an even uglier recent run than Fitbit.

Rough and Tumble
For the first stretch of its life as a public company, Fitbit looked like a winner. But shares have collapsed this year in part because of concerns about more competitors making fitness-tracking devices and smartwatches.
Source: Bloomberg

It's easy to understand the Fitbit doubters. Investors on edge about economic conditions globally have shunned technology companies that can't meet financial expectations. The company and its executives have made some ill-timed stock sales.

Plus, a raft of competitors including Chinese hardware companies and even Wal-Mart are wading into smartwatches and fitness bands. They will inevitably squeeze down prices and erode Fitbit's position as the top seller of wearable devices. Oh, and that fruit company. Even before Fitbit sold a single share of stock to the public eight months ago, there were fears that Apple would wipe Fitbit off the map with the Apple Watch.

But there's sensible skepticism and then there's overreaction. Maybe Fitbit can't stay the on top of the leader board in selling wrist hardware, but the company has strengths that are being overlooked.  The company has healthy gross profit margins, its shares are cheaper than they've ever been and the company has so far weathered the competition by coming up with gadgets that people are willing to buy for a premium.

The root of Tuesday's stock rout was an unwelcome financial forecast -- the same thing that battered stock prices of LinkedIn and GoPro in recent weeks.

Fitbit said Monday that it expected to barely break even or post a small profit for the three months ending in March as it spends more money to promote its products and to pay factories to ramp up production of gadgets that proved more popular than Fitbit expected. The unexpected spending increase is worrisome but not enough to swamp the good news. 

Fitbit's revenue nearly doubled in the three months ended in December compared with figures in the period a year earlier. And gross margin -- or the share of Fitbit's revenue left over after the company pays to produce its products -- is climbing and is now approaching 50 percent. 

Fitbit did say its costs to speed up manufacturing in the current quarter would hurt gross margins a bit. Still, Fitbit compares favorably with Apple -- one of the most enviably profitable companies on the planet-- and its 40 percent gross profit margin the most recent quarter. 

Fitbit has also proved adept at coming up with new devices that people want to buy even as Apple, Samsung and Chinese hardware makers push their own pricey smartwatches or fitness trackers that cost as as little as $20. Fitbit said 79 percent of its revenue in the most recent quarter came from sales of three of its newest (and most expensive) products. 

Survival of the Fittest
After a rough year for Fitbit shares, the company's price-to-earnings ratio is now less than the S&P 500 index but greater than Apple's.
Source: Bloomberg
The earnings for P/E calculations are for the prior 12 months, excluding some one-time items.

Fitbit's shares are slimming down, too. After a rough 2016 for Fitbit shares, the stock now trades at about 16 times the company's adjusted earnings in the last 12 months, according to Bloomberg data. Fitbit's stock was twice as expensive just two months ago. 

Yes, it's tough to imagine Fitbit can sustain its prices as more companies sell wearable devices. But at least Fitbit is starting from a position of strength. It's hard to ignore a company that managed to sell nearly $2 billion in wrist baubles last year at rising gross profit margins in a competitive market. That is the kind of fitness that is hard to overlook.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Fine, there are worries about the company that rhymes with Snapple, too. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net