Oppenheimer Reluctantly Maintains Buy on Fitbit Inc (FIT) After Q4 Preannouncement Shakes Investor Confidence

Fitbit Inc (NYSE:FIT) shares toppled 16% yesterday after the leading fitness wearables maker preannounced results that massively disappointed investors. Though Oppenheimer analyst Andrew Uerkwitz does not downgrade the stock just yet, he does not believes the company’s progression of “woes” bodes well at all for the brand or opinion among investors.

For now, the analyst waits to make any sudden moves before the full release due at the end of next month. Believing the press release “raises more questions than it answers,” Uerkwitz reiterates an Outperform rating on FIT without listing a price target.

For the fourth quarter, FIT management preannounced gross margin that considerably will underperform its prior guidance for 46%, which the analyst attributes to a $68 million excess inventory charge, a consequent charge of $37 million from a rise in rebates and promotions, a surge in return reserves leading to an additional $41 million charge, and accelerated warranty reserves- another $17 million detriment.

Next came the company’s restructuring plan that sent ripples of unease through the Street, as FIT prepares to cut its workforce by 6%, or approximately 110 employees. The analyst underscores a new aim to reign in operating expenses (OpEx) by $200 million, with the company’s new goal circling $850 million for 2017. However, “This is still well above 2015 OpEx of ~$550M,” notes Uerkwitz.

The one positive note surrounds the company’s intent to focus on smart watch expansion, as FIT recognizes growth prospects in this industry. Taking on Pebble as well as Vector Watch, the analyst believes, “it appears FIT is trying to accelerate this effort.”

Overall, when looking at the preannouncement as a whole, “The negative news is a fitting end to 2016, which was marred by multiple negative revisions. The company said today it expects to report the sale of about 6.5 million devices and report revenues of $572M to $580M for the 4th quarter ending 2016. This is below previous guidance of $725M to $750M (which was revised down just a quarter ago). The company also announced preliminary thoughts on 2017. Revenue is guided $1.5B to $1.7B and, most important, a cash burn is expected, with free cash flow expected to be between negative -$50M and -$100M. Sadly, we believe this latest pre-announcement may have ruined any investor confidence that was left. We will update our model and thesis with additional thoughts after the company reports with further information on February 22,” Uerkwitz concludes.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, four-star analyst Andrew Uerkwitz is ranked #709 out of 4,370 analysts. Uerkwitz has a 52% success rate and gains 5.6% in his yearly returns. However, when recommending FIT, Uerkwitz forfeits 48.6% in average profits on the stock.

TipRanks analytics exhibit FIT as a Hold. Based on 21 analysts polled by TipRanks in the last 3 months, 2 rate a Buy on FIT stock, 16 maintain a Hold, while 3 issue a Sell. The 12-month average price target stands at $8.80, marking a 48% upside from where the stock is currently trading.

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