As I write this, shares of Fitbit Inc. (FIT) are surging 50% in its first day as a publicly-traded company. If you haven’t seen the snappy commercials already, Fitbit makes a line of fitness-tracking devices ranging in price from $50 to $250. The base model tracks the wearer’s steps and calories burned, and the more advanced models come equipped with GPS tracking and heart rate monitors. Some models even track the wearer’s sleep patterns to determine how good a night’s sleep s/he got.
There’s no denying that Fitbit has become a fad. In its eight year history, Fitbit Inc. has sold 20.8 million devices—more than half of which were during 2014 alone. In 2014, Fitbit Inc. brought in $745 million in revenue, and captured 68% of the U.S. fitness activity tracker market. The IDC estimates that 126 million wearable devices will be shipped in 2019. So it’s no wonder that Wall Street has also jumped on the Fitbit bandwagon.
However, I wouldn’t recommend buying FIT just yet, and here’s why. For starters, the conservative investor would do well to avoid IPOs. Far too often, these deals are structured so that insiders and backers get the best price, and then they tend to dump shares on the market after the “lock-up” period expires. That’s why you tend to see share prices fall off a cliff a few months after IPOs. The bottom line is that there’s too much volatility early on, and unless you can get a sweet deal on these offerings, you’re probably going to get hosed.
In the case with Fitbit, I recommend that you come back in a year or two and then consider adding it. And I say that for one specific reason—earnings results. Fitbit needs at least four quarters’ worth of data before you can really assess if it has the growth needed to be a successful investment. And that’s what’s really hot right now—especially given that earnings season kicks off in just a few weeks.
And if you’ve followed me for any length of time, you know that I follow eight key metrics that have been proven to determine the financial health of a company. I watch sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow and return on equity. If your investments get passing grades in these eight areas, you can sleep easy.
Fitbit doesn’t have the sales and earnings data that I need to determine whether or not it is a fundamentally strong stock. The fact is that the wearable fitness tracker market is getting more and more competitive, with Jawbone, Garmin Ltd. and Apple Inc. all fighting for greater market share. So I’d check back in on FIT once it has released four quarters’ worth of data, and I’ve added it to Portfolio Grader.