Just over a year ago, fitness tracker maker Fitbit (FIT) grabbed headlines with its $4 billion IPO. During its first trading day, FIT shares surged 50%. At the time, I recommended holding off on buying into the FIT craze until we had more information about its financials.
This turned out to be the smart move. Since going public, FIT has plunged 59%. One big problem is that the fitness tracker market is starting to get very crowded. Fitbit competes with Garmin (GRMN), Fossil‘s (FOSL) Misfit, Jawbone, and Moov, to name a few. It also doesn’t help that Fitbit recently ranked second lowest (out of five major fitness band makers) in a J.D. Power & Associates customer satisfaction survey.
However, with Fitbit’s second-quarter announcement just hours away, the company has been making headlines again. Is this earnings report going to mark a turnaround for Fitbit? Is now the time to buy? Let’s find out.
When you plug FIT into Portfolio Grader, you see that the stock currently earns a B for its Fundamental Grade. Fitbit has been doing well with sales growth (A) and its track record of earnings surprises (A). However, when it comes to earnings growth (F), earnings momentum (D) and operating margin growth (D), Fitbit is lagging behind.
This is a red flag because it shows that Fitbit hasn’t yet figured out how to be profitable. The company’s research and development costs have been ballooning—Fitbit plans to triple its R&D costs to $150 million this year. This, combined with aggressive marketing spending, has taken a bite out of Fitbit’s bottom line.
In fact, analysts expect Fitbit’s earnings to be 47.6% lower than a year ago. To add insult to injury, the consensus earnings per share estimate has plunged, from $0.26 three months ago to $0.11 today. This suggests that analysts are being cautious with their estimates.
Any stocks that I buy before earnings need to have three things: 1) Robust sales growth, 2) strong earnings growth and 3) Positive analyst revisions. Fitbit has one of those things, which is solid sales growth. However, until Fitbit demonstrates that it can achieve consistently year-over-year earnings growth, I won’t be buying it anytime soon. I consider FIT a D-ranked Sell.