Shares of Fitbit Inc. are on track to post their biggest single-day percentage gain in the company’s history after the wearables pioneer posted a surprise profit for the third quarter.
Fitbit
FIT, +25.48% generated
adjusted earnings per share of 4 cents, while analysts surveyed by FactSet had been projecting a 1 cent per-share loss. Fitbit had not claimed a quarterly profit in more than two years. The company’s revenue of $393.6 million exceeded the $381.3 million FactSet consensus.
“The quarter represented meaningful incremental progress toward the company’s goals of achieving greater financial stability and transforming the business beyond fitness trackers with a greater emphasis on measurable health outcomes,” wrote William Blair analyst Jeffrey Garro, who rates the stock at market perform.
Fitbit shares are up nearly 24% in Thursday morning trading. The stock would have to close up more than 15.2% percent to set a new record for its largest single-day gain.
William Blair’s Garro was encouraged by the company’s commentary around the new Charge 3 fitness tracker, which was introduced during the quarter.
“Initial sell-in contributed meaningfully to third quarter results by our estimate,” he wrote. “Management commented that sell-through has been strong, indicating further momentum for the fourth quarter and noted that direct-to-consumer pre-orders through Fitbit.com will positively impact the fourth quarter.”
Oppenheimer analyst Andrew Uerkwitz wrote that Fitbit’s transition to becoming a more services-oriented business has “been a slog,” but he’s upbeat about both this area of Fitbit’s business as well as its device opportunities.
“With trackers finding a base and smartwatches gaining traction (internally now 49% of revs and 2nd in global market share), the hardware business seems to have found its footing and we could see growth in 2019,” he wrote. “More important, as digital health becomes material, investors should expect more detail on monetization and user strategy.”
Uerkwitz has an outperform rating and $8 target on the shares.
Not all are convinced about the company’s turnaround, however. Morgan Stanley’s Yuuji Anderson wrote that the holiday quarter “is when the rubber meets the road.” He cautions that the company’s recent revenue beats could be the result of the way it timed new product introductions. “We look towards holiday sell-through and inventory levels exiting the year as more representative of Fitbit’s demand trends,” he said.
Anderson is skeptical that Fitbit’s devices will perform strongly during the holidays. The company forecast better earnings for the fourth quarter than analysts expected, but the revenue guidance was below consensus estimates.
“We think the current pace of new features is not enough to stabilize declining demand this year and are concerned that the functional similarities between Charge 3 and Versa will result in cannibalization,” he said. Anderson rates the stock at underweight with a price target of $4.
Fitbit’s 24% rally on Thursday has cost short sellers $57 million in mark-to-market losses, according to S3 Partners, a financial technology and analytics firm. The price movement has wiped out the $55 million in year-to-date profits that short sellers had racked up during the rest of 2018.
Ihor Dusaniwsky, the managing director of predictive analytics at S3, said that the stock rally on Thursday isn’t the result of short covering, as short sellers are adding to positions as the shares gain.
Fitbit shares have gained 3.1% so far this year, while the S&P 500
SPX, +0.81% has risen 2.2%.
