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Fitbit Reports A Profit: The Street Debates What's Next

AAPL | November 1, 2018

Fitness tracker and smart watch maker Fitbit Inc (NYSE: FIT) reported a return to profit in its third-quarter print Wednesday.

The Analysts

Wedbush's Michael Pachter maintains an Outperform rating on Fitbit with an unchanged $6.50 price target.
William Blair's Jeffrey Garro maintains at Market Perform.
Morgan Stanley's Yuuji Anderson maintains at Underweight with an unchanged $4 price target.
Deutsche Bank's Jeffrey Rand maintains at Hold.
Citi's Jim Suva maintains at Sell with an unchanged $5 price target.

Wedbush Sees M&A Possibilities

Fitbit's top-and-bottom-line in Q3 came in better than expected and there's reason to believe the momentum can carry over through next year, Pachter said in a Thursday note.

The company maintained its full-year 2018 revenue guidance, which implies the potential for upside in the fourth quarter, as the Charge 3 continues to be the top-selling Android-compatible wearable watch in the U.S., the analyst said.

Fitbit should start benefiting from medtech initiatives in 2019, Pachter said.

Fitbit's partnership with Google could be seen as a starting step toward Google acquiring Fitbit outright to compete against Apple Inc. (NASDAQ: AAPL) in the medtech space, he said, adding that "only a matter of time" before Fitbit's stock reflects the possibility of an acquisition.

William Blair: Meaningful Progress

Fitbit's Q3 could be viewed as "meaningful incremental progress" toward financial stability and a transition away from core fitness trackers to devices that emphasize overall health, Garro said in a note.

Despite the seventh consecutive quarter of Fitbit reporting earnings ahead of its own guidance, the stock is trading at an enterprise value of roughly 0.4 times 2019 sales, the analyst said. This multiple is balanced and factors in the company's medtech opportunity, which could take time and be overshadowed by near-term demand trends with its existing products, he said.

Morgan Stanley: Some Confidence Returns

Fitbit's quarterly print should restore some confidence amid a competitive smart watch space and difficult activity tracker market, Anderson said in a note. The company's revenue beat is likely due to the timing of new product launches, the analyst said, adding that Fitbit's progress in releasing new features isn't compelling enough to stabilize declining demand.

Anderson cited three concerns to justify Morgan Stanley's bearish stance:

Non-device revenue fell 18 percent from a year ago and the contribution from Health Solutions is still small.

The gross margin of 40 percent was worse than expected.

Device sales fell in the quarter and will likely continue declining in the fourth quarter.

Deutsche Bank: Cautious Outlook

Fitbit's Q3 print shows unchanged smart watch momentum, and the company could see a "big holiday" season on the basis of consumers looking for cheaper alternatives to the Apple Watch, Rand said in a note.

Investors should still hold a cautious stance on the stock given the uncertainty on whether the tracker business can grow in the long run, the analyst said.

Citi: Not As Smart As Apple

Fitbit's earnings report is overshadowed by the reality that Fitbit's products "are not as smart" as the Apple Watch, Suva said in a note. Nevertheless, the Q3 report is "good news" given the stock's 17-percent decline since the start of 2018 versus the 6-percent gain in the Nasdaq index, the analyst said.