Fitbit (FIT) , my favorite stock for 2018, has finally been showing some signs of life. The company's recent rally - shares rose 20% between last Monday and Tuesday - came on the heels of a negatively viewed first quarter earnings report. Lowered second quarter revenue guidance was the culprit, as the few remaining growth investors in the name seemingly capitulated, sending shares below $5 on May 3.
Since that poorly received earnings report, shares are up 50%, and now trade at a 17-month high. There is no doubt that last week's mini-rally was due to renewed interest in the name brought by a Citron Research report that put a short-term $15 price target on FIT, assuming it is not acquired before hitting that level. Citron lauded Fitbit not for its continuing push to try and make money in the wearables business, but rather for the possibilities that exist in medical monitoring, and "digital health", and flipping from a company dependent on selling products to one with recurring revenue not as dependent on unit sales.
From a value investor's perspective, building a position in FIT over the past 18 months has been based on buying a broken growth story with a great balance sheet. That is never a safe bet per se, but in this case, it has been compelling enough. In 2015, FIT was a $40+ stock, $664 million in cash on the books, and no debt. When first quarter earnings were announced in early May, it was a sub $5 stock with $658 million, or $2.75 per share in cash, and no debt. Despite falling revenue and challenges in the wearables business, that presented a long enough runway of liquidity to give the company time to try and get its act together.
The stock had been beaten up to the point that any good news or the perception of positive developments would likely fuel a rally. The health monitoring possibilities, in my view, have been a potential sweetener for some time, but not a done deal. I did, and still do, however, believe that the company will ultimately be acquired by a bigger fish.
Despite FITs inability to generate a sustained bottom-line in wearables, it certainly has established a strong brand name; the possibilities in health monitoring are also at the very least interesting enough at this point. With a market cap of $1.74 billion, and cash and short-term investments of $658 million, FITs enterprise value (market cap plus debt less cash) is less than $1.1 billion, making it a potentially small target for an acquirer.
If anything, the ride should be an interesting one from here.