Friday turned out to be an interesting day for Fitbit (FIT) , which has gone from cult stock to red-headed stepchild since going public in 2015. Shares ended the day up about 12% following a report that the company has sought the advice of an investment bank and may be exploring a sale. Shares briefly hit $4.50 during the trading day, 23% higher than Thursday's close before closing at $4.10.
Shares cratered in August, falling to $2.85 in the weeks following the second quarter earnings release, in which the company beat consensus estimates on revenue and earnings, but cut full year revenue guidance. The market's patience for the name has clearly all but run out, and there is little, if any credence given to FIT's move away from hardware, to recurring revenue sources, such as its Health Solutions business, which is on track to generate $100 million in revenue this year. Ditto for the late August launch of Fitbit Premium, the company's paid subscription service. FIT indeed has much to prove, and the early 2015 euphoria, when shares traded above $50, is gone, and most growth investors have moved on.
Enter the special situation, or certain corners of the value crowd (some value investors I know would shudder at the notion that I categorize FIT as a value name), which may not view this as a $50 stock but one that carries a well-known brand name, as well as a longer runway then its given credit for. FIT's $565 million, or $2.20 per share in cash and short-term investments will obviously not last forever, but does provide some time for the company to get its act together. The company stated in its earnings release that cash and short-term investments should actually end the year higher than now, somewhere in the $570 million to $600 million range.
In addition, the company's solid balance sheet is a catalyst for the notion that someone might acquire it. Currently trading at 2.6x net current asset value (current assets - total liabilities), FIT fits (pun intended) the profile - solid brand name, no debt, relatively large levels of cash - of some of the "double-nets" that have been acquired in recent years. In fact, I've long seen FIT as an acquisition candidate; admittedly, I've been wrong so far, so we'll have to see if the current chatter has any validity.
In these situations as a value investor, you are not under the impression that a company like FIT will ever get back to anywhere near it's all time high. You are, however, betting that the markets have overly-punished the name, that it represents the veritable "fifty-cent dollar".