Analysis: Fitbit’s week from hell

Fitbit's stock has been on the slide (image: Freaktography on Flickr, https://www.flickr.com/photos/rockandrollfreak/)

Fresh from its IPO, wearables firm Fitbit saw its stock price fall off a cliff after declaring its first quarterly results as a public company. The drop – which took place over several days, has so far wiped more than $1Bn from the company’s value. 

Here’s WTW’s analysis.

It started off so well for smart wristband and tracker maker Fitbit. The firm – which we consider to be the gold standard in smart wristbands / fitness trackers – completed its IPO in June.

Fitbit priced its stock at $20 per share and on June 18, the first day of trading, shares opened at $31.20. Apart from a small loss of momentum in late June, FIT stock climbed steadily until a peak of $51.64 on August 5 … valuing the company at more than $9Bn.

Then Fitbit announced its Q2 results. Although these were the first as a publicly-traded company, the numbers themselves give no reason to justify what happened next.

Fitbit's stock has been on the slide (image: Freaktography on Flickr, https://www.flickr.com/photos/rockandrollfreak/)

Fitbit’s stock has been on the slide (image: Freaktography on Flickr)

Especially since results and earnings-per-share had exceeded analyst estimates (although it’s important to remember that these estimates are based on guidance from the company itself), Fitbit executives must have been shocked and awed by the subsequent fall-off in the company’s stock price – especially since the Q3 forecast was optimistic.

We expect that President and CEO James Park was particularly stung. Only weeks ago, he tried to make quarterly reporting look all so simple, telling Forbes magazine: “My outlook is never have a rough quarter.” Sage advice indeed. Here’s James being interviewed by Fortune.

Seems that Park learned the hard way that sometimes, even avoiding a rough quarter is not enough. Since he led the team of executives in reporting on the results,  the stock has continued to tank.

Stock wobble cuts 1/5th from company value
From the $51.60 high, Fitbit stock fell sharply, to $40 (on August 12) and may yet fall further, reducing Fitbit’s value to “just” $8.1Bn. The wobble is exacerbated by the fact that Fitbit has a pretty high price/earnings ratio of more than 150:1, in comparison to a more-established tech firm like Google (32:1) or Apple (13:1).

Market watchers attributed the drop to gross margins being under pressure – combined of course with the fact that we believe the hype bubble had been pumped up so far that it simply burst when Fitbit declared its results.

Fortune magazine commented that the “Fitbit stock swoon could lead to fewer tech IPOs” while CNBC said CEO Park should take the blame for his performance during the Fitbit earnings call with financial analysts – who lowered their ratings of Fitbit as a result.

So star earnings, a market-leading set of products that are creaming the wearables market in terms of sales … and a CEO who is probably licking his wounds as a consequence of the call.

Before you allow too much sympathy for Fitbit’s management team, remember that their stock options mean they – and their venture backers – are still sitting pretty.

Fitbit CEO still not going hungry
Despite the stock price fall, CEO Park’s net worth has still increased considerably in the last 12 months. According to Fitbit’s SEC filings, he has access to 1,113,222 stock options priced at just $0.08 per share and a further total of 2,418,930 “unexercisable” shares. Today, those 1.1m shares alone have an open market value of more than $44m. Park is also said to have 93 patents to his name.

Early Fitbit investors have done well. In an SEC filing, Fitbit states: “Between June 2013 and August 2013, we sold an aggregate of 19,433,258 shares of our Series D convertible preferred stock at a purchase price of $2.2127 per share”.

That’s a return of more than 1600 percent at current market rates. The biggest pre-IPO stakeholder was one Jonathan D. Callaghan, a member of the Fitbit board of directors, and Managing Partner of True Ventures. He owned 22.4 percent of the company, or more than founders James Park and Eric N. Friedman combined, prior to the IPO.

Approaching 25m devices sold
Fitbit’s Q2 earnings report also showed that to date, the company has sold around 23.7 million wearable devices – and is seeing a steady increase in the number of units shipped (with a spike in sales in Q4 last year, as Fitbit took advantage of the Christmas gift market) plus a growth in its ASP (average sales price), showing that it’s selling more of its higher-end devices like the Charge, Charge HR and Surge.

Fitbit's stock price certainly didn't Surge this week (picture courtesy Fitbit)

Fitbit’s stock price certainly didn’t Surge this week (picture courtesy Fitbit)

According to market share data from Slice Technologies, Fitbit has a dominant market share of 60% of wearables and was hardly affected by the introduction of the Apple Watch.

What’s more is that Slice estimates that 43 percent of Fitbit sales are direct, via its own website – with a further 40% sold on Amazon. This means great margins for Fitbit when it’s not paying commission to a third-party to sell its product.

We’re not making any recommendations to buy, sell or hold Fitbit stock, by the way – just offering up some comment on what’s been a long seven days for the company.

/WTW

One Response to Analysis: Fitbit’s week from hell

  1. […] Fitbit’s first quarterly results as a publicly listed company (despite the report being positive, as we commented at the time). Then lightning struck again at the start of the year, when Fitbit launched its colorful […]

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