Fitbit Falls despite Earnings Beat—Are Investors Right to Run?
Margin remains low
Revenue growth has been very good for Fitbit this quarter, but it has also incurred high non-operating expenses. Gross margin fell to 47% in 2Q15 from 51% in 2Q14. Fitbit has incurred stock-based compensation expenses and amortization of $0.82 million and $0.46 million, respectively, which brought the margin down a little bit. Sales and marketing expenses remained at 60% of total operating expenses at $70 million in comparison to $13 million in the corresponding quarter last year.
The above chart shows that net income as a percentage of EBITDA (earnings before interest, taxes, depreciation, and amortization) remains low at 20.50% in 2Q15 over 50.7% in the corresponding quarter the previous year. This year Fitbit had issued warrants to let holders buy the underlying stocks, which act as a security that gives the holder a right to buy stocks at a predefined date.
Fitbit has incurred around $46 million in warrant-related expenses compared to $3 million in the previous quarter. This increase has reduced the company’s net income drastically. For both quarters, GAAP EPS (earnings per share) stayed the same at $0.07. However, on a non-GAAP basis, EPS was at $0.21 in 2Q15 over $0.09 in the corresponding quarter the previous year.
Low barriers to market entry
Fitbit (FIT) has the largest market share, but it is losing some of that now that more companies are entering the market. Samsung gained some market share with its wearable device, called “Samsung Gear Fit.” Microsoft’s (MSFT) fitness tracker “Microsoft Band” is a smart watch that also acts as a GPS.
Apple (AAPL), which makes up 13.05% of the PowerShares QQQ ETF (QQQ), is targeting the segment with its SmartWatch, which is also a fitness tracker that measures heart rate, sleeping pattern, and other performance measures.
Fitbit is offering tough competition for Garmin (GRMN). Garmin provides GPS navigation devices for the automotive, marine, and aviation sectors. Though Fitbit entered the fitness tracking market with high expectations, its second quarter earnings are low due to a dramatic slowdown in sales.
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