Is Fitbit’s Rally for Real This Time?

Fitbit (NYSE: FIT) stock has surged more than 35% over the past couple of weeks. A slew of much-needed good news has been released, offering relief for shareholders after results from the first quarter of 2018 failed to impress. While recent events may be the proof many investors have been looking for that the worst is history, the stock has rallied before, only to fizzle. This time around, though, things may actually be different.

An event-filled couple of weeks

A few months ago, Fitbit announced two new smartwatches after its first proper smartwatch, the Ionic, flopped. The new devices, the Versa and a kids’ version christened the Ace, took aim at competitors’ smartwatches in the most important way the Ionic failed at: pricing.

Less than two months into general availability, Fitbit announced that 1 million Versa units have been sold. That makes it the fastest-selling new release in the wearable company’s history. The Ace for kids also just became available, putting another smarter fitness tracker into the lineup.

The Versa, displayed on the left, and Ionic smartwatches. Image source: Fitbit.

In recent weeks, Fitbit also announced that its products are now available in Indonesia and Vietnam, as well as a delayed release of the Versa in Taiwan. That gives the company an outlet to sell in a new collective market with a population of nearly 400 million. Sales in Asia are small for Fitbit, representing only 11% of revenue in the first quarter of 2018, so the new availability could provide a boost to international growth.

If all of that positive news wasn’t enough to make investors cheerful, short-seller firm Citron Research published an enthusiastic report on June 11 calling for more than 100% upside potential in Fitbit’s share price. When combined with the aforementioned announcements from Fitbit itself, Citron’s bullish notes were apparently too good for traders to ignore, giving the stock another boost.

What now?

Citron Research aside, at least some of the recent advance in Fitbit’s share price looks warranted. A device win with the new Versa is just that: a win. That’s important after years of getting squeezed by Apple‘s (NASDAQ: AAPL) premium offering above and cheap Chinese manufacturers’ alternatives below. Once the king of the wearable fitness tracker market, Fitbit fell to third place in 2017 behind the now-reigning champ, Apple, and Chinese electronics company Xiaomi.

However, if Fitbit really wants to be a long-term winner as a business — not just a peddler of devices — it needs to wean itself off of the fitness hardware sales conundrum. No other company has cracked the hardware sales code quite like Apple, and the success of the Watch thus far eclipsing anything Fitbit has conjured up is indicative of that. Versa may turn those tables, but the real key likely lies in the realm of software and the stable recurring revenue streams it could potentially generate.

With a few smartwatches now in its lineup, Fitbit has begun turning its attention to software to help meet its long-standing mission statement to become a healthcare company. Online health coaching platform Twine Health was acquired early in 2018, and a new digital health collaboration deal was struck with Alphabet‘s Google Cloud a few months later. Some early signs of success have been mentioned, like the 2.4 million downloads of Fitbit’s new women’s health tracking feature in its first month of availability.

Don’t expect any of those items to move the needle when Fitbit reports on the second quarter; the Versa will likely lay claim to the spotlight. However, that may be good enough to give the stock’s recent rally some legs. If Versa’s momentum has staying power, it could be enough to push the wearables company out of contraction mode and back into growth. That has been the elusive ingredient holding shares back all along, and Versa could buy Fitbit more time to get its new ventures up and running.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (A and C shares), Apple, and Fitbit. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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