Fitbit's Demand Issues Will Take Time To Correct, Needs New Products And Partnerships

Shares of Fitbit Inc (NYSE: FIT) were set to open on a new 52-week low Thursday as it plunged 30 percent in the pre-market hours to $8.97 as weaker demand and supply constraints led to a lower third-quarter profit and a cut in the fourth-quarter outlook.

The mid-point of Fitbit's new fourth quarter revenue guidance of $725 million–$750 million is 23 percent lower than the prior range, and gross margin of 46 percent is about 4 points lower than the company’s earlier forecast.

As such, Morgan Stanley downgraded the stock to Equal Weight from Overweight and slashed its price target by $20 to $11.

“Fitbit needs new products and partnerships to re-accelerate growth, and management needs to improve execution to gain investor confidence but both will take at least several quarters,” analyst Jerry Liu wrote in a note.

The tepid third-quarter results were attributed to weak demand for the new Flex 2 and Charge 2, coupled with lack of advertising and supply constraints on the Flex 2. Liu said the supply constraints on Flex 2 hurt fourth-quarter revenue by $50 million and fourth quarter gross margin by 4 points.

Liu noted that if the company follows this year’s product schedule, then new form factors and features will not hit the market until March and September.

Despite having the largest fitness tracker installed base, the lack of execution and supply constraints is hampering the results, and Fitbit may lag behind competitors like Apple Inc. (NASDAQ: AAPL) and Garmin Ltd. (NASDAQ: GRMN) in striking partnerships with insurers.

That said, the analyst expects product improvements in 2017 and partnerships to materialize in six to 12 months.

But, being conservative in the near-term, Liu cut his 2017 revenue forecast to $2.1 billion from $3.3 billion, gross margin view to 46 percent from 49 percent and EPS to $0.50 from $1.73.

“Our EPS is predicated on lowering operating expenses by 6% next year (excluding $9 million litigation expense in 1Q16). We believe limiting investments is reasonable as many of the new products next year are already in the pipeline today,” Liu added.

Shares of Fitbit closed Wednesday’s trading at $12.81 and were down 29.82 percent at $8.99 at last check Thursday mid-morning.