Fitbit's 'Test' Will Come In The Second Half, Says Bearish BofA

Fitbit Inc FIT reported a second-quarter earnings beat Wednesday afternoon, but the "real test" for the maker of fitness trackers and watchers is still ahead, according to Bank of America Merrill Lynch. 

The Analyst

Analyst Ryan Goodman maintained an Underperform on Fitbit with a price target lifted from $4.80 to $5.25.

The Thesis

Fitbit's newest Versa smartwatch is proving to be a "big win" for the company, as it shipped more than 1 million devices and sold out during the recent quarter, Goodman said in a Thursday note. (See the analyst's track record here.) 

Despite recent momentum in the quarter, Fitbit only reiterated its 2018 revenue guidance of $1.5 billion, which will create some debate among investors ahead of the holiday shopping season, the analyst said. 

Fitbit faces a big test ahead with two potential outcomes, Goodman said: Fitbit's momentum and reinvigorated brand strength creates a "halo effect" that supports a new product launch in the fall. On the other hand, the company is ramping production of its devices, but stabilization in the fitness tracking market "remains to be proven," and the ability to expand its smartwatch portfolio without cannibalization is uncertain, he said. 

BofA's revised $5.25 price target is based on a 0.4 multiple on 2019 estimated EV/S, which is a discount to the device manufacturer peer group of two times, the analyst said. The valuation discount is justified given Fitbit's continuing revenue and profitability decline, he said.  

Price Action

Fitbit shares were trading down 5.82 percent to $5.58 at the time of publication Thursday. 

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Photo courtesy of Fitbit.