Piper Jaffray Insights: Fitbit Inc (FIT), Nike Inc (NKE)

Analyst Erinn Murphy at Piper Jaffray offers her insights into consumer players Fitbit Inc (NYSE:FIT) and Nike Inc (NYSE:NKE), after the former posted a print with a sore spot of weak fourth-quarter guidance that has sent investors scrambling and after hosting a corporate progress update meeting with the Nike’s management.

As usual, we recommend taking analyst notes with a grain of salt. According to TipRanks, analyst Erinn Murphy is ranked #3,929 out of 4,165 analysts. Murphy has a 39% success rate and confronts a 6.9% loss in her yearly returns. When recommending FIT, Murphy forfeits 57.7% in average profits on the stock. When suggesting NKE, Murphy loses 2.6%. Let’s delve deeper:

Fitbit Inc

Fitbit shares are taking a close to 33% nosedive after the fitness tracking giant delivered third-quarter results yesterday that failed to impress investors. In reaction, Murphy fears “visibility could be muted” entering the holiday season and on through the first half of 2017, causing her to become bearish on the stock’s forthcoming prospects.

In reaction, the analyst downgrades from Neutral to an Underweight rating on shares of FIT while slashing the price target from $14 to $8, which represents an approximately 7% downside from current levels.

For the quarter, FIT posted $540 million in revenue, which fell short of both Murphy’s projection of $508 million as well as consensus of $507 million. The company garnered “in-line” EPS of $0.19, mirroring the Street, and gross margin of $48.1, compared to the analyst’s expectation of 48.1% and the Street’s estimate of 48.5%. The real issue for FIT lies in its fourth-quarter guidance, which was “significantly adjusted” on back of supply constraints circling the Flex 2 likely to yield a $50 million “drag” fourth-quarter, waning APAC sales, and “softening” demand.

Subsequently, the analyst has cut EPS expectations for the year 2017 from $1.20 to $0.46.

Murphy explains, “While we have been on the sidelines since February, wary on the 2H nature of the year, we did not anticipate a guide-down of this magnitude this early on in Holiday. We now find ourselves struggling to model out a scenario where units […] can reaccelerate in 1H. We see the earnings algorithm drastically changing into FY17 given tepid revenue & the high cost structure. In addition, the on-going competition in the category […] could pressure ASPs further. While FIT is the leading brand in wearables, market share is already established […]”

Ultimately, “While management is rebalancing product launches in Spring & Fall […], it could take time to stabilize the P&L from a cost perspective. We’d expect units in 1H to see a healthy decline and given competition & already established market share, it could be hard for units to re-accelerate over the next year,” Murphy contends.

TipRanks analytics demonstrate FIT as a Hold. Out of 16 analysts polled by TipRanks, 3 are bullish on Fitbit stock, 11 remain sidelined, and 2 are bearish on the stock. With a return potential of 27%, the stock’s consensus target price stands at $11.45.screen-shot-11-03-16-at-07-51-pm

Nike Inc

Yesterday, Murphy hosted a small group meeting with Nike’s international relations (IR) team at world headquarters (WHQ) in Beaverton, Oregon. Though management is positive, particularly with regards to next year’s NBA partnership, and believes NKE’s pipeline to be strong, the analyst prefers to play it safe and cautiously observe from the sidelines. As such, Murphy reiterates a Neutral rating on NKE with a price target of $53, which represents a 7% increase from where the shares last closed.

The analyst comments, “While management did not discuss competition by name, they indicated ‘competition is intense’, noting the athletic space is attractive. That said, management looks to their scale advantage & track record of innovation in response to competition, noting sometimes there are ebbs & flows to innovation.”

For the analyst, Nike’s pricing strength stems from this very legacy of innovation that management hopes will serve in scoring a competitive edge. Meanwhile, the athletic retailer corporate team has confidence that ASP gains can bolster the growth of gross margin into the future.

Overall, “Top-of-mind conversation points with investors spanned from: 1) futures; 2) competition; 3) ASP architecture; 4) puts & takes on margins; 5) mgmt.’s current thoughts on its innovation platform; 6) inventory management; and 7) over-arching dynamics within athletic between performance & fashion. There has clearly been more controversy around NKE shares in the last few months but mgmt. is confident in their pipeline of innovation & their longer-term strategy. We are taking a wait-and-see approach given competition which leaves us wary of the likelihood of achieving $50B sales & mid-teens margin by 2020,” Murphy surmises.

TipRanks analytics indicate NKE as a Buy. Based on 27 analysts polled in the last 3 months, 17 rate a Buy on NKE, 9 maintain a Hold, while 1 issues a Sell. The 12-month price target stands at $62.71, marking a nearly 27’% upside from where the stock is currently trading.


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