Regardless of Earnings, the Fitbit Stock Outlook Weakens the Heart

Stocks to sell

Fitbit (NYSE:FIT) reports earnings after the bell tomorrow. The provider of health and fitness monitoring devices has seen its stock hammered amid competition from smartwatches made by Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). Now, as the company reports its third-quarter earnings, investors will probably focus on signs that Fitbit stock can maintain its competitive moat.

Earnings, Revenue Should Beat Estimates

For the third quarter, analysts predict a loss of one cent per share. If this estimate holds, it will represent no change from the same quarter last year. Wall Street also forecasts revenue of $381.2 million.

This revenue level comes in at about 2.9% below the same quarter the previous year when the company brought in $392.5 million. The company has met or beaten expectations in the last four quarters. I expect that streak to continue in this quarter as well.

The Mote Defines Fitbit Stock

Still, I see the revenue decline as a symptom of a far more considerable worry—a breach of its moat. The Apple iOS and Android smartwatches replicate the key features of the products of FIT. Moreover, these products tie the fitness and health-related information collected into their respective ecosystems. This makes the data applicable to more applications.

Both Apple and Alphabet stand as the largest and best-resourced companies in the world. The market cap of Fitbit stock, about $1.15 billion, remains a small fraction of the cash held by both Apple and Alphabet. Instead of a buyout, both companies have employed a strategy of product offerings to push FIT stock aside.

FIT appears to have few responses. Fitbit can continue to offer its products at a much lower cost. However, consensus earnings estimates for Fitbit remain negative through at least 2021. Without a clear path to profitability, employing the low-cost strategy will probably not help FIT stock long term.

Hope for FIT’s Moat Remains

A glimmer of hope remains that they could copy the strategy of Garmin (NASDAQ:GRMN). GRMN stock enjoyed a partial recovery as it focused on fitness and sports niches after smartphones made their GPS devices obsolete.

Fitbit stock may have found this through a deeper dive into the health and fitness segment. In September, the company announced an expanded alliance with Humana (NYSE:HUM).

This partnership, called Fitbit Care, will use the Fitbit Plus app to combine health coaching and virtual care. As Humana’s preferred solution, it will bring in more than five million members from its employer group segment.

I think this shores up its moat for now. However, it remains unclear how much this helps FIT long term. This even inspired Wedbush to upgrade FIT to an outperform with a $6.50 price target. However, I see little that would prevent Humana’s competitors from employing the iOS or Android ecosystems for the same purpose.

This competition has forced Fitbit to fall more than 90% from the high of $48.98 it saw just over three years ago. It now trades at around $4.60 per share, just above its 52-week low.

While a surge to the Wedbush price target remains possible, I think any good news from the earnings report that could boost FIT stock will only have a temporary effect.

Final Thoughts on Fitbit Stock

The quarterly report on Fitbit will probably focus more on the company’s competitive moat than on earnings and revenue. Analysts expect the stock to report third-quarter losses of one cent per share. They also expect revenues of $381.2 million, a 2.9% decline from year-ago levels. Given FIT’s history of meeting or exceeding estimates, I would expect to see at expectations at least met.

The far greater worry hinges on the collapsing moat of Fitbit stock. Apple and Android have introduced their own smartwatches, and FIT continues to sustain losses. The partnership with Humana gives the company breathing room and a possible niche.

Still, with the ability of others to form similar alliances, I do not feel this move will create a lasting competitive moat. For this reason, I think fitness trackers will report better health for those who avoid Fitbit.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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