Fitbit's Warning Surprises Investors, Analysts

When Fitbit Inc FIT cut guidance from estimates of $2.4 billion to a range of $1.5 to $1.7 billion, Wedbush analyst Nick McKay was taken aback.

And he may not have been alone.

Prior to the release of Fitbit’s regulatory filing, many analysts seemed ambivalent about the company’s capacity for improvement. Since November, 18 firms had issued Hold ratings, while Bank Of America Merrill Lynch urged investors to Sell and Oppenheimer and Raymond James advised to Buy.

However, they could have anticipated poor annual results by third-quarter demand softness, which McKay said seemed to carry over into the fourth quarter.

The analyst speculated that wearables, which underperformed across the industry this year, didn't do as well in the fourth quarter as management had anticipated. But other factors also contributed to the disappointing figures.

“Flex 2 looks like it's lagging,” McKay said. “The catalog is aging as time goes by, we didn’t get a new product at CES, and we’re still waiting for a new product announcement after today’s press release.”

Some Still See A Profit In Fitbit

McKay said those buying on the company's weakness on Monday were either value investors, awaiting product announcement or anticipating an acquisition, but he offered reservations about the latter.

“I think the problem with that would be, with how much shares have traded down in recent months, I would question what kind of premium Fitbit would want before they’re willing to discuss a transaction,” he said.

Regardless of justification for incoming investments, McKay said the purchases will take time to pay off.

“For longs right now...I think they’re probably looking at a slow climb back up,” he said.

And it doesn’t seem that Fitbit’s luck will turn any time soon.

“From the press release, it implies to me that they expect demand softness to continue into the first half of the year,” McKay said.

Fitbit shares were down 13.7 percent to $6.10 at time of publication.

Nick Donato contributed to this report.