Morgan Stanley: Fitbit Needs Product Cycle Improvements

Fitbit Inc (NYSE: FIT)'s fourth-quarter report Monday certainly disappointed investors, based on the double-digit percentage decline in the stock. But a bearish case isn't called for just yet, according to Morgan Stanley.

The Analyst

Morgan Stanley's Yuuji Anderson maintains an Equal-weight rating on Fitbit's stock with a price target lowered from $6 to $5.

The Thesis

Fitbit has multiple long-term initiatives ahead, especially in the health care space, Anderson said in a Tuesday note. In the meantime, Fitbit said it is working on a "multiyear transition process," the analyst said. 

While this may be the case, the company's earnings Q4 report signals "disappointing performance" with its Ionic smartwatch, along with issues in its software and sensor ecosystem, Anderson said. 

The improvement of Fitbit's product cycle in terms of optionality and value must be its near-term focus, or the business could further diminish, the analyst said. In fact, if multiple issues aren't addressed in the near-term, any future product launches could "turn us further cautious," Anderson said. 

Morgan Stanley's revised $5 price target is based on a 0.5x FY19 revenue multiple, which represents a discount to the company's peers. A discounted valuation is justified based on expectations for continued losses and "uncertainties" surrounding product cycle performance, Anderson said.

Morgan Stanley could turn more positive on the stock if management shows evidence of product cycle improvements and if the health solutions segment becomes a sufficient driver of growth, the analyst said. 

Price Action

Shares of Fitbit were trading lower by around 13.31 percent at $4.82 at the time of publication Tuesday morning — below the stock's all-time low of $4.90.

Related Links:

Stifel's Bearish Stance On Fitbit No Longer Applies, But Concerns Remain

How Fitbit's New Ionic Stacks Up Against The Apple Watch Series 3

Photo courtesy of Fitbit.