Is Fitbit a Strong Play?

One of the reasons to invest or trade small cap stocks in a satellite portfolio is to avoid the hype. Large cap or mega cap stocks draw a lot of attention and noise and it is sometime difficult to filter through all the gobbledygook. Well, today we are going to try and tackle a high profile stock and offer our thoughts.

Fitbit, Inc. (NYSE – FIT - $37.52) has been all the rage since its IPO in June.

The chart below illustrates the stock’s performance since then.

FIT 6 month Chart

(Source: www.google.com/finance)

From afar, Fitbit epitomizes all the best of Silicon Valley. The Company has been around since 2007 and is solid play on high tech and fitness. The Company makes both wrist bands and clippable devices that monitor a user’s fitness activity by tracking the calories burned or distance covered. The products include Fitbit Zip, a wireless tracker that allows users to track daily activity statistics, such as steps, distance, calories burned, and active minutes; Fitbit One, a clippable wireless tracker, which tracks stairs climbed and sleep; Fitbit Flex, a wristband-style tracker that tracks steps, distance, calories burned, active minutes, and sleep; and Fitbit Charge, a wireless activity and sleep wristband, which tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. The Company also provides Fitbit Charge HR, a wireless heart rate and activity wristband; Fitbit Surge, a fitness watch that consists of GPS watch, heart rate tracker, activity tracker, and smartwatch; and Fitbit Aria, a Wi-Fi connected scale that tracks weight, body fat percentage, and body mass index. In addition, it sells various accessories, such as bands and clips, charging cables, and Fitbit apparel.

In Monday’s Guide we mentioned an up and coming way for investors and companies to hook up, crowd funding. Well, now is the time to think about crowded gyms in early January as people start their New Year’s resolutions after packing on the holiday pounds and the seasonal play on this phenomenon. The holiday retail season is one strong reason to love FIT. Another healthy balance sheet indicator is zero debt as of the end of 3Q15.

As far as the longer term prospects for Fitbit, margins indicate solid performance. Gross margin of 48% is right in line with the industry average of 47%. The solid efficiency metric is the operating margin of 20% versus 5% industry average. Finally, the growth story should not be ignored. The Company is expected to hit a top line revenue figure of $1.75 billion this year and improve that number by 34% next year to $2.33 billion.

FIT dropped nearly $5 earlier this week on news of a secondary offering despite clobbering EPS and revenue estimates when the Company reported its 3Q financial results. We think this dip combined with reasons mentioned above presents a buying opportunity. Look for FIT to climb to $45 by the end of 1Q 2015.

Have a great day!

Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.

It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.

This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.