Citi Downgrades Fitbit: A 'Not So Happy Holidays'

Fitbit Inc FIT witnessed a sequential decline in new user take rates in Q3. This suggests slowing unit growth, and recovery seems likely to be “pushed out to the 2017 holiday season,” Citi’s Stanley Kovler said in a report.

He downgraded the rating on the company from Buy to Neutral, while reducing the price target from $20 to $10.

Slowdown In Growth

There has been a faster-than-expected slowdown in Fitbit’s largest end market, the US, which accounts for 72 percent of the company’s revenue. New user take rates of 60 percent in Q3 marked a decline from the 66 percent reported in the prior two quarters.

“Underlying sell-through growth has flatted out,” Kovler mentioned. He expects ASP to grow 14-16 percent year-over-year in Q4, implying a 9 percent year-over-year decline in sell-in units and a marginal increase in sell-through units.

Holiday Season 2016

Fitbit’s forecast for the October to December quarter came in significantly short of analysts' average estimates.

Fitbit recorded 49 percent of its annual revenue in the holiday season of 2014, and 39 percent in 2015. A similar seasonal setup was expected for Q4 of 2016.

“However, a confluence of new product challenges and weaker end demand curtailed the Q4 outlook, while saturation is taking hold in Fitbit’s largest markets (US and Australia),” Kovler wrote.

The analyst added that while international expansion was earlier expected to offset a potential US slowdown, this “has not played out,” with international revenue growing only 2 percent year-over-year in Q3.

While the wearable tech industry is expected to be worth more than $71 billion in five years, companies with larger ecosystems, like Apple Inc. AAPL and Alphabet Inc GOOGL, are competing for the lion’s share of the market.