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Can Fitbit Bounce Back After Last Week's 25% Drop?

Image source: Fitbit. 

Fitbit (NYSE: FIT) stock cooled off last week, shaking off a quarter of its value after following up a reasonably healthy financial report with raised guidance that's problematic once you dig a little deeper into the story. A whopping 89.6 million shares traded hands on the week, Fitbit's second busiest trading week since going public last summer. It indicates that a lot of investors wanted to get out in a hurry.

The leader in fitness trackers seemed to have accomplished some pretty heady growth through the first three months of the year. Revenue soared 50% since the prior year to hit $505.4 million, fueled by encouraging market acceptance of its newest bracelets and its first push into the competitive smartwatch market. Margins took an unwelcome but certainly not catastrophic step back, but adjusted earnings of $0.10 a share blew through the $0.03 a share that analysts were forecasting and the even lower target that Fitbit had set up for itself.

Fitbit initiated its 2016 guidance back in February, calling for $2.4 billion to $2.5 billion in revenue and earnings per share to clock in between $1.08 and $1.20. At the time it also issued a subdued outlook for the first quarter, eyeing $420 million to $440 million in revenue and adjusted earnings between breakeven and $0.02 a share. Obviously Fitbit's profit of $0.10 a share on $505.4 million is a beat on both ends of the income statement, but file that cheeriness away for a second.

Sometimes a promotion is actually a demotion
The out-of-favor maker of wrist-hugging activity counters raised its guidance last week. It's now modeling an adjusted profit of $1.12 a share to $1.24 a share on $2.5 billion to $2.6 billion in revenue. Wall Street normally goes into a giddy high-five frenzy when outlooks are pushed higher, but let's assess what this really means for the final nine months of 2016. The midpoint of its new earnings range is $0.04 a share higher than before, but it already beat its own guidance by $0.09 a share during the first quarter. In other words, there's a nickel per share going the wrong way here. It beat its first quarter's revenue mark by $75.4 million, accounting for the lion's share of the $100 million boost. In other words, while Fitbit technically did raise its guidance for 2016 it's actually not much of a bump on the top line and an actual decline on the bottom line through the next three quarters.

It also didn't help that Fitbit's guidance for the second quarter is well short of where Wall Street pros had parked. Jim Cramer took Fitbit to task on CNBC following the report, suggesting that it should just stop issuing quarterly forecasts and stick to annual outlooks. Sorry, Cramer -- you're wrong this time.

If Fitbit's lips were sealed on what would be a sorely disappointing second quarter the stock would've gotten battered three months now. Investors also aren't dumb. They could've worked the same math that I did two paragraphs ago, arriving at the conclusion that its earnings guidance was actually being reduced -- not increased -- for the final nine months of 2016. 

There's also something to be said about a company's ability to have a better read on what's going on in the current quarter than it does for the entire fiscal year. The longer you go out the more likely you are to be wrong.

Fitbit's still in a good place. It's selling plenty of Blaze smartwatches and Alta fitness-tracking bracelets. Even the seemingly damaged current quarter represents 44% year-over-year growth in revenue at the midpoint of its range. Yes, profitability will be squeezed as it tries to break into new markets and invest in a digital health strategy. However, with 4.8 million connected health and fitness devices sold through the first three months of 2016 and international growth taking off it's hard to bet against Fitbit. The stock deserved to take a hit following its quarterly update, but a 25% plunge is too much. Fitbit's decline offers an intriguing entry point for opportunistic investors.