Short interest: 41.9%. That's the number you need to think about with Fitbit (FIT), not the unbelievably fabulous earnings, not the incredible sales growth, not the dominance -- 88% of the market -- not the amazing hold on corporate wellness.
What matters is that monster short position and the 21 million shares to be sold, 14 million by insiders and 7 million by the company itself.
That could, for the moment, eliminate the tightness in the stock that had 42 million shares outstanding going into this fabulous quarter.
I think this short position is acute, because it's the giveaway that institutions, particularly hedge funds, have been fighting this thing tooth and nail since it came public. It's a tough situation, because all of that insider selling tends to verify what the hedge funds are thinking and, perhaps more importantly, it's a blindside to what the retail investor's thinking.
Fitbit, like Tesla (TSLA), like GoPro (GPRO), like Shake Shack (SHAK), is a company that's perceived by retail investors as one of the great device markers of our time. The penetration of products is pretty extraordinary, as are the corporate accounts and the astounding success overseas. Given the accelerated research spend and the ramp up of a corporate salesforce, you can only bet that its first mover lead here could get bigger.
The people who use it -- wellness enthusiasts, not just athletes -- are one of the fastest growing cohorts worldwide. These are people who, unlike institutions that are betting against Fitbit, like the product so much they want to own the stock. They also know that because of the incredibly low price point vs. the Apple (AAPL) watch, the two have nothing to do with each other. So they have been buying and holding.
But many of these investors don't know how the market works. How do I know this? I have had my share or problems with Action Alerts PLUS charity portfolio's Twitter (TWTR) of late -- including a non-stop blitz of penny stock promoters who have hijacked my mention column -- but I was astounded last night about how few people who owned it really understood the magnitude of the stock offering and how it can weight on the stock regardless of the quarter's prowess. The fact that the company earned $0.24 vs. the $0.10 estimates and raised guidance from a range of $0.69 to $0.77 to $0.92 to $0.96 is all that these holders needed to know.
They don't understand the mechanics that now allow the shorts to lay all over the stock, knowing they can cover on the secondary. They don't get that, like Shake Shack, the amount of supply will satiate those who want to cover as well as those who want in, and more.
Now, I think the shorts themselves are too cute by half. Fitbit is going to have an excellent holiday season. It built a huge amount of inventory ready for the season, and I think that it truly is more of a company than GoPro, with much broader adoption and much better management. There will be demand institutionally for the device.
The fact is, though, this stock sells at 37x earnings right here and that might be too tough for many institutions to own, given the amount of insider selling.
Or, put it this way: I think that this stock could have gone to an all-time high without the new supply, because of all of the excitement that would have been, given the remarkable quarter. Instead, it goes down, it befuddles those who don't know how it works, and causes a stagnation cycle with a downward bias now that the short sellers have some supply to shoot against.
In short, if it were about the earnings and the sales growth, the stock would go higher. But it is about the shorts and the supply and, sadly for this terrific company with a very forward looking management, that will blunt the progress of the company in a way that its ardent fans least expect it to do. And the ardent fans just don't have the capital to take the secondary down within this range or hold on to it once the supply is un-leased and the shorts squeeze is over.