Analysts Debate Fitbit's Margin Outlook

Fitbit Inc FIT reported first-quarter results that came in better than expected, highlighted by growth in devices sold but a drop in average selling price. Here's how two analysts reacted to the print.

Morgan Stanley: Margin Ramp Concerns

Fitbit reported a beat across multiple metrics, including revenue by 6 percent while device growth of 36 percent year-over-year beat expectations, Morgan Stanley's Katy Huberty said in a research report. The company exited the quarter with a "healthy" channel inventory as new products accounting for 67 percent of shipments versus 33 percent last year.

Gross margin of 34.2 percent in the quarter was at the low-end of management's guidance and fell 1,300 basis points from last year due to a difficult comp and a higher mix of lower-margin smartwatches. Management also guided second-quarter margins to a range of 36-38 percent, which was short of the research firm's prior 40-percent estimate.

Management kept its full-year margin guidance unchanged at 40 percent, which Huberty said implies a ramp in the second half of the year is needed for the management to hit its goal. The company has some tailwinds in its favor, including improving yields on new products and growing revenue in the high-margin services business.

There is a risk to Fitbit's margins in the back half of 2019, Huberty said, especially if the mix continues to gravitate towards smartwatch sales. Alternatively, the company may be forced to lower prices on its fitness trackers to improve sell-through.

Huberty maintains an Underweight rating on Fitbit with a $4 price target.

Wedbush: Potential For Return To Profit Possible

Fitbit's first quarter showed the ASP of its devices dropped from $115 last year to $93 ($91 excluding accessories), Wedbush's Michael Pachter said in a research report. Management's strategy to help support active user growth may be the right move ahead of a push into a new premium subscription offering in the coming months.

Fitbit's services business accounted for around 1 percent of total revenue and this figure should grow over time and help the company return to a profit. The analyst, however, said the timing of a notable uptick in the "nascent" segment remains unclear.

As such, a neutral stance on the stock is warranted. Pachter maintains at Neutral, with the price target lowered from $6.50 to $6.

Price Action

Fitbit's stock traded lower by more than 5.5 percent at $5.07 per share Thursday afternoon.

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Photo courtesy of Fitbit.