Picking a favorite stock for the year is a tall order, especially for a sometime dumpster-diving value investor in an environment where the dumpsters are a bit sparse these days. Take this pick with a grain of salt; it does have a longshot quality about it.
I've owned Fitbit (FIT) for just over a year now, and took an initial position in December of 2016, with the notion that it was a tax-loss selling candidate that might recover in 2017. That did not happen, and the stock traded in a range of between $5 and $8, ending the year below $6. I did nibble at it more during the year, though, which can be a positive in uncertain cases such as this one. In fact, I am actually in modestly positive territory with the name so far.
The smartwatch maker is almost universally disliked by Wall Street, and I can't say that's very surprising. This short-lived cult stock once exchanged hands for more than $50/share, when wearables were the next big thing. But competition followed, as it often does with technology, and the company's fortunes soured. Third quarter revenue, the latest reported, was down 22% quarter/quarter, and the company flipped from profitability to red ink. Earnings for that quarter, and the prior quarter as well, were a bit better than expected, but drastically dumbed down from prior estimates, and losses are still losses.
So, why even consider taking a position in a dog with fleas; a company that most investors have abandoned? First off, expectations are low; most probably don't expect the company to survive. While companies can sometimes trade on greed, i.e., ridiculously high expectations, that sometimes gives way to fear. That's where I believe Fitbit is at this point in investor's eyes. This may never have been worth $50/share, and may never see those levels again. The question is whether $6/share is as ridiculously low as $50 was ridiculously high.
Second, a look at the balance sheet reveals a company that may have a longer recovery runway than one might think. FIT ended last quarter with $659 million, or $2.81 per share in cash and short-term investments, and no debt. When you are losing money, cash is a transient number, no doubt. However, so far, the company has kept the cash burn to a minimum. In fact, over the past year cash and short-term investments have declined by less than $13 million. With the rollout of the Ionic Smartwatch, the product that may make or break the company, it is likely that cash has declined since the end of the third quarter. We won't know that until the company reports fourth quarter results in February. Welcome to the wonderful world of dumpster diving "wait and see".
Clearly, Fitbit has pinned its hopes on sales of Ionic, which has received both high praise -- five-day battery life -- and criticism -- limited apps. There is plenty of competition, namely Apple's (AAPL) Series 3 smartwatch, which is likely keeping any investor optimism for FIT at bay.
Also weighing on the stock are reports that the Ionic is not selling as well as expected, and that inventories have been building. Stifel Nicolaus recently cut the stock to "sell" with a $6 price target, which ironically is where shares are currently trading.
Clearly, the deck appears to be stacked against FIT, and a bet on the name assumes that there will be some level of a positive surprise in the near future. It does not have to be earth shattering, just enough to lift the cloud on a company that currently trades at about 2.5 times net current asset value (current assets less total liabilities), and has more than 40% of its market cap in cash.
In addition, even with fleas, this is a recognized brand name, with a small enterprise value of less than $800 million, which might ultimately attract a bigger fish with deeper pockets.
Clearly, this is a very speculative situation, not for widows and orphans, or anyone with a weak stomach.