Though the stock appears to be primed to bounce back and recover some of its losses from the end of last week, the post-earnings market reaction resulted in a decline of 17.35% in two short days.
Let’s take a closer look at the first Fitbit earnings report since the company’s mid-June IPO and consider its bright spots, as well as the negatives that the market is clearly focusing on.
First, the key numbers.
Revenue for the quarter ended June 30 was $400.8 million, significantly beating analyst expectations of $319. Included in this impressive revenue number is a 250% increase in international revenue, suggesting that the company is gaining traction in some key foreign markets.
But as impressive as this revenue figure is, there are certainly issues.
First, margins are slipping, down from 51% in the year-ago quarter to 47%. And the company offered margin guidance of 47% to 48%, indicating that we won’t see margins above 50% anytime soon, if ever again.
But earnings per share only look good if you look at Fitbit’s own non-GAAP method of recording them. If you trust those numbers, Fitbit earnings surged from $0.09 a year ago to $0.21 in the latest quarter.
But if you look at the GAAP figures, as any objective investor should, you see that the company reported GAAP EPS of $0.07, the same number it reported in the year-ago quarter.
You may recall that Fitbit’s IPO was one of the most notable of 2015.
The stock jumped more than 50% on its first day, even after the company raised the IPO price range and decided to sell additional shares.
The Apple Effect
Meanwhile, the company faces considerable and mounting competition from Apple (NASDAQ: AAPL), the elephant in the room for wearable device makers. While companies like Fitbit and Jawbone continue business as usual, one of the most powerful and influential companies that the world has ever seen has entered the wearables market with its Apple Watch.
I’m of the mind that Apple is capable of blowing most wearable device makers out of the water. Of course, an Apple Watch is unlikely to appeal to someone who owns an Android or other non-Apple mobile device.
To be fair to Fitbit’s prospects, the company isn’t going down easily.
The company spent $30.5 million on research and development during the second quarter, up from around $12 million in the second quarter of 2014. After spending around $22 million on R&D in the first quarter of 2015, this additional $30.5 million in R&D spending brings the total for the first half of the year to around $53 million.
Investors can only hope that Fitbit is using this money wisely to produce something new to help it compete with the Apple Watch and the dozens of other wearable devices and fitness trackers on the market.
It is certainly a good sign that the company generated so much of its sales from its new products. On the conference call that followed the earnings report, Fitbit Chief Financial Officer Bill Zerella noted that 78% of the company’s quarterly revenue came from its three newest products, the Charge, Charge HR and the Surge. Charge launched in late 2014, while the other two products launched in early 2015.
The early success of these products suggests that Fitbit is doing something right with its R&D spending.
Of course, Fitbit is doing something else right if its newer products – which are considerably more expensive than its earlier products – are selling so well. It means that Fitbit is trying to go after a higher-end market, the same “premium product, premium pricing” strategy that has worked so well for Apple. And Fitbit is having some success at it.
Still, I’d have a hard time being interested in owning shares of a company that faces such stiff competition from Apple, no matter how great the first Fitbit earnings report’s revenue figures were.
This article is brought to you courtesy of Jay Taylor from Wyatt Research.