What a quick year 2018 has been; it seems like it was just yesterday that I was writing my first column of the year. The subject matter was my favorite stock for 2018, which happened to be Fitbit Inc. (FIT) . At the time I wrote that piece, FIT was trading slightly above $6 a share.
Fast forward 12 months and FIT is just above $5, down about 18% since that column was published. That's hardly the type of results desired from a favorite stock, but if one is to ever trumpet any of their investment successes, it is equally important to point out what didn't work. I don't take any comfort in the fact that both the Russell 2000 and Russell Microcap indices are also in negative territory during the same timeframe, down 13% and 15%, respectively; a "favorite" stock is meant to outperform significantly.
However, I still believe Fitbit is undervalued and I significantly increased my position in the name in late January and late February, buying additional shares in the range of $5.40 to $5.50. Shares topped out at $7.21 in June, but since have seesawed their way back to last Friday's $5.03 close.
Overall Fitbit had a decent year, beating consensus earnings and revenue estimates the past three consecutive quarters. Third-quarter results were particularly satisfying as FIT not only beat consensus estimates by five cents a share but also reported positive earnings per share of four cents (non-GAAP).
Fitbit's balance sheet also remained solid, which is one of the reasons I own it. FIT ended the quarter with $623 million, or just over $2.50 per share, in cash and short-term investments. That's about half the company's market cap. FIT also remains debt-free, so its enterprise value (EV) is just $626 million, and it trades at just 2.5x net current asset value.
One of the concerns about companies that have relatively large amounts of cash but are not profitable is that their cash will be burned through, rendering cash a useless measure. In Fitbit's case, cash and short-term investments fell about 5.5%, or $36 million, over the past year, which is minor in my view.
Ultimately, Fitbit must prove it can sustain profitability, and perhaps then investors will return to the former cult name that traded in the high $40s just over three years ago. Consensus estimates are calling for earnings per share of seven cents for the fourth quarter, which would be up from five cents a share three months ago. The ever-important holiday retail season will tell the tale for Fitbit in the short term, with results scheduled to be released on Feb. 19.
I also still see another potential path for investment success with FIT, that being via acquisition. The company has built a very strong brand name, and with a relatively tiny EV of $626 million could make for a cheap target by a larger fish.