Fitbit Stock Is Being Underestimated by Wall Street

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Quite often, Wall Street focuses on the proverbial trees and ignores the forest. That's certainly the case with FIT stock in the wake of the company's second-quarter results reported Wednesday. The Street seems fixated on worries about Fitbit's (NYSE: FIT ) conservative full-year guidance, gross margins, and European sales. But it's ignoring the fact that Fitbit's Versa smartwatch has clearly rejuvenated the company.

Also being ignored by Wall Street are the many bright spots within the company's Q2 results. There's huge growth of Fitbit's revenue from the Asia Pacific region. And, the company is continuing to improve its devices' health diagnostic capabilities.

Fitbit's Impressive Results

In many ways, Fitbit's Q2 results were quite impressive. Driven by extremely strong demand for the company's new Versa smartwatch, Fitbit's results beat analysts' consensus expectations on both the top and bottom lines. Moreover, Fitbit is now projecting that its revenue will fall just 3% year-over-year in the current quarter. That compares to a 15% decline last quarter.

Additionally, Fitbit's CEO James Park tweeted that,"we expect … to return to growth and profitability in the second half of the year." That's quite a turnaround for a company that reported a non-GAAP loss of $61 million in 2017 and lost $125.7 million in the fourth quarter of 2016.

Also worth noting is that Fitbit has clearly become the premier competitor to Apple (NASDAQ: AAPL ) in the smartwatch space. As Park pointed out, more Versas were sold in North America than all the smartwatches of Garmin (NASDAQ: GRMN ), Samsung and Fossil ( NASDAQ: FOSL) combined.

Nor should investors be scared by the prospect of Fitbit having to take on Apple. Fitbit has shown that it's equal to the task. The success of Samsung's smartphones shows that beating Apple worldwide definitely isn't impossible. More importantly, the fact that Versas are cheaper than the latest Apple Watches, provide a much longer battery life, and more health resources should enable Versa to more than hold its own against the tech giant's wearables.

FIT Stock Driven Down by Small Data Points

But instead of the big picture, skeptical investors appear to be focusing on data points that are either minor or likely to be transitive. These cause FIT stock to drop in the wake of its results. Specifically, the company's revenue declined 15% year-over-year, its European revenue tumbled 39%, its gross margin dropped 2.1 percentage points and it did not raise its full-year revenue guidance.

But Fitbit expects its topline trends to improve after retailers reduced their fitness tracker inventories last quarter. The gross margin decline is a natural consequence of its smartwatches becoming more popular than its fitness trackers. As for the failure to increase guidance, Fitbit basically admitted that it was simply being conservative. The company said that it did not raise its topline guidance partly in order to "de-risk the year in terms of looking at guidance," adding that "it's prudent not to be raising guidance."

On a negative note, however, Fitbit could be moving more quickly to realize more of its potential and diversify its revenue streams. Fitbit says that it's focused on building recurring revenue streams by charging consumers for services and revenue sharing with health insurers. But the company admitted that recurring revenue still represents a "relatively immaterial" portion of its revenue. It does not seem to be moving very quickly or efficiently to change that situation. For example, it has not yet launched revenue sharing deals with health insurers, and judging by what I've seen since receiving my Versa as a gift a month ago, it does not seem to be doing much if anything to market paid services to consumers. However, judging by Fitbit's comments on its earnings conference call, I'm confident that the company will step up its efforts on those fronts soon.

FIT Stock Has Multiple Positive Catalysts

Meanwhile, Fitbit and FIT stock has multiple, ongoing positive catalysts. The growth of Versa sales should accelerate as positive views about the device spread through the Internet and word of mouth, and as Fitbit ramps up supply of the product. Additionally, Fitbit's products are clearly becoming more popular in Asia, as sales of its devices in that region jumped 66% to $35 million.

Finally, the company is always adding more health diagnostic capabilities to its smartwatches. That trend should accelerate, given its recently announced partnership with Alphabet (NASDAQ: GOOGL )(NASDAQ: GOOG ).

The big picture outlook for Fitbit is clearly quite bright, but Wall Street is focusing on the trees. As a result, FIT stock is a great buy.

As of this writing, Larry Ramer owned shares of FIT stock.

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The post Fitbit Stock Is Being Underestimated by Wall Street appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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