Analysts: If You Want To Get Fit, Don't Buy Fitbit Stock

Fitbit Inc FIT reported second-quarter results highlighted by a poor performance of the Versa Lite. Management also lowered full-year guidance and provided a disappointing outlook to the third quarter.

The stock plummeted more than 20% Thursday morning, hitting an all-time low of $3.27 per share.

The Analysts

Morgan Stanley's Katy Huberty maintains an Underweight rating on Fitbit's stock with a price target lowered from $4 to $3.20.

Wedbush's Michael Pachter maintains at Neutral, price target lowered from $5 to $4.

Morgan Stanley: Losing Strategy

Fitbit in March released the Versa Lite, which is a low-tiered smartwatch and was intended to lure consumers into the Fitbit ecosystem. Huberty said it's evident Fitbit "missed the mark" and needs to spend the next few quarters dealing with elevated inventory and becoming more promotional.

Management cited its poor Versa Lite sales in lowering the midpoint of its 2019 revenue guidance by $95 million to $1.455 billion. Looking forward to 2020, it's difficult to model any revenue growth even off the lowered base until management proves it can win over customers with annual product refreshes.

The company saw its Fitbit Health Solutions grow at 41% in the first half of 2019 and if the pace of growth decelerates it can still generate 7% of total revenue at $100 million.

Bottom line, Huberty said Fitbit's current investment profile is hindered by its ability to predict demand ahead of a new product launch. Mistakes in modeling anticipated demand creates notable revenue, earnings and free cash volatility and any initiatives to fix what's wrong will take time.

Related Link: Analysts Debate Fitbit's Margin Outlook

Wedbush: Disappointing Guidance

Fitbit's quarter was "decent" with revenue of $314 million edging the Street's expectations of $312 million while device sales rose 32% year-over-year to 3.5 million units, Pachter wrote in a note. However, management's third-quarter revenue guidance of $335 million to $355 million fell short of the Street's model of $399 million while EPS and EBITDA also fell short.

Management expects to see higher unit sales moving forward although at a lower average selling price and gross margins at 35% versus a prior 40%.

For the time being, Pachter said investors are "underwhelmed at the modest growth" seen but the company has encouraging prospects with its medical applications. A recurring revenue stream offers a new higher gross margin business. However, there's limited visibility at this time and the stock should be valued at 0.3 times EV-to-Revenue on 2020 estimates, or $4 per share.

Price Action

Shares of Fitbit traded around $3.34 at time of publication.