When last we left Fitbit Inc. (FIT) in early May, the company had come off another better-than-expected quarter at both the top and bottom lines, but skeptical investors still did not like what they saw and expressed doubt about the company's future.
Fitbit shares are down 18% since then and are off 36% over the past year, and they now sit very near an all-time low. The baby has all but been thrown out with the bathwater, and markets view Fitbit solely as fitness tracking company, a largely commoditized business that will never generate a positive bottom line.
That's why FIT currently trades at just 0.39x enterprise value (EV) to sales and 2.93x net current asset value (NCAV). For perspective, consider that Garmin Ltd. GRMN -- larger, profitable and admittedly not exactly an apples-to-apples comparison -- trades for 4.08x EV to sales, and more than 10x NCAV.
Markets, which saw Fitbit shares trade in the $50 range four years ago, want to see profits and refuse to give the company any credit for progress or for a rather solid balance sheet that gives Fitbit a longer runway to further its foray into smartwatches and healthcare services, the latter of which should top $100 million in revenue this year.
Fitbit ended the first quarter with $644 million, or more than $2.50 per share, in cash and short-term investments, and the company has not been burning cash to the degree one might expect. Cash and short-term investments stood at $664 million at year-end 2015 and $658 million at the end of last year's first quarter. With a current market cap of $1.1 billion and an enterprise value (market cap plus debt minus cash) of just over $600 million, I continue to view FIT as an acquisition candidate for a bigger fish. To that end, it possesses many of the earmarks I look for in a takeover prospect -- lots of cash, a solid brand name, and the possibility to thrive under the ownership of an entity with deeper pockets.
This is not a name that I would have considered owning back in its early days; it was clearly overpriced and had fad-like characteristics. However, growth investors gave up on the name, and I believe it has been overly punished; it offers a classic case of when value investors may be inclined to step in, as I have, building a currently underwater position with an average cost in the mid-$5 range. Some may call it a value trap or dead money, but time will tell the tale.
At last Friday's closing price of $4.39, theoretically, if you back out its cash holdings, this is a $1.89 stock, trading like an option on whether Fitbit will ever succeed. We will get the company's next progress report late this month or early the next, when it reports second-quarter earnings; consensus estimates are calling for revenue of $312 million and a loss of 18 cents per share.
