Fitbit: What Might The Upside Look Like?

Last week, I took a stab at calculating Fitbit’s (FIT) price floor, following the stock’s 80%-plus stumble since 2015 but apparent plateauing over the past 12 months. My liquidation value analysis suggested FIT could realistically still drop 70% from current levels under an absolute worst-case scenario (i.e. one in which Fitbit shuts down its doors today or tomorrow). I stated, however, that $2.50/share might be a bit more realistic of a hard floor, once I relax some of my harshest assumptions.

Today, I turn the other way and ask myself: how high might Fitbit’s shares go, assuming the next few years turn out to be much better for the San Francisco-based wearable device maker?

Credit: Business Cloud

Hard-core, ultra-optimistic bulls might defend that the sky is the limit for this stock. Consider the following analysis, from research firm IDC:

Since the wearable market’s inception, it’s been a matter of getting product out there to generate awareness and interest. Now it’s about getting the experience right. In the years ahead, users will be treated to second- and third-generation devices that will make today’s devices seem quaint. Expect to see a proliferation in the diversity of devices brought to market, and a decline in prices that will make these more affordable to a larger crowd.

It looks like wearable devices, while securing a few scattered wins in the past few years — think Apple’s (AAPL) Watch, not Alphabet’s (GOOG)(GOOGL) Glasses — are still in the early stages of their life cycle as a popular product category. According to IDC, the “Wearables 2.0” phase will result in 18% annualized growth by 2021, in shipment volume terms. The most popular wristband sub-category, Fitbit’s bread and butter until now, should grow at a much more timid 1% over the same period, while smartwatches, the company’s bet for the coming few years, is poised to double at least.

See table below for more details.

So to estimate a best-case scenario and calculate FIT’s potential upside, I make the following assumptions:

  • Wristband sales: Fitbit will be able to reverse course, fend off low-cost competitors and maintain market share in the wristband space. The sub-segment in general is expected to grow at an unimpressive 1% annual pace through 2021, but I aggressively assume that the company will outperform and grow at 2.5% over the next four years.
  • Smartwatch sales: this is the wild card. Should Fitbit be successful and become one of the “thrivers” in this space (the first product within this category, the Ionic, was introduced as recently as October 2017), the company’s future financials would likely benefit greatly. I assume that, by 2021, Fitbit will account for 7.5% of the total 161 million device market, which I find very aggressive but plausible under a best-case scenario.
  • Average selling prices: for both the wristband and smartwatch categories independently, prices are likely to drop over time. But because the latter might represent nearly half of Fitbit’s 2021 sales under my assumptions, up from what I estimate to have been less than 3% in 2017, the favorable mix suggests overall ASPs should rise and plateau around 2021.
  • Margins: here, I assume that gross margins will dip in 2018 as guided for, but reverse course in 2019 as (1) pricier smartwatches become a more relevant product category and (2) gains from scale start to kick in once again. Opex should naturally rise, but I believe they would fall as a percentage of sales when or if sales growth picks up the pace.
  • Other assumptions: non-device sales should remain capped at about 5% of total revenues. Effective tax rate should eventually settle near the new U.S. corporate rate of 21%, and shares outstanding should remain largely stable, even if increasing slightly to support share-based compensation.

Source: DM Martins Research, using data from company reports

Once I plug in all the numbers above, I arrive at a projected non-GAAP EPS of $1.50 by 2021. Assign to that number a 20x earnings multiple that should be reasonable for a tech device company experiencing healthy top-line growth of 10% by then, and the stock might be worth $30/share in a few years under a very best-case scenario.

Before bulls start salivating over the prospects of a stock quintupling in only four years, let me be very clear about the speculative nature of this potential investment. Assume that Fitbit might not be as successful in the smartwatch space and instead ends up controlling only 5% of the market by 2021 for a total of about 8 million smartwatch units sold that year. In this case and holding all other variables unchanged, my projected stock price drops to a mere $4/share as most of the gross profits generated would be consumed by rich opex and tax expenses.

Key takeaway

Perhaps talking in extremes ($2.50/share floor, $30.00/share potential) might not help readers make a quality decision on whether to invest in FIT at current levels. In my view, the key takeaway from the exercise above is that the success of Fitbit and its stock is highly dependent on how the company (1) might perform in the high-ticket, high-projected growth smartwatch space and (2) will navigate the saturated wristband market in the next few years. The company needs volume to create operating leverage and send earnings (and likely share price) soaring. But accomplishing this feat is nowhere near a guarantee, and I believe the risks for shareholders are sizable.

In the end, I remain on the sidelines, neither taking a bearish stance on FIT nor betting any of my hard-earned money on this speculative play.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Dollar Tree Vs. Dollar General: Searching For The Best Bargain

I have just recently started to look at the low-cost retail sub-sector a bit more closely, after having observed the remarkable performance of (and written about) Ross Stores (RST) and, most recently, Dollar General (DG).

But an analysis of either of these companies and stocks would be incomplete without a side-by-side look at their most direct competitors. Today, I set aside Ross for a moment and focus on Dollar General — a company that I have recently called “all-weather” due to its apparent ability to perform well in both good and bad macro environments.

Credit: montage using images from PG Harris and Dallas Morning News

In this article, I face off Dollar General against key peer Dollar Tree (DLTR) to try and determine which of these stocks might be the most compelling play in the general merchandise discount space. While I do not intend to issue a definitive statement on which name might be the best buy without performing further due diligence, I hope this comparison will serve as a good “first impression” analysis.

Digging into the numbers

Let’s start with general facts and figures on both companies.

Dollar General is a much older retailer that has been around long enough to see, survive and thrive through different economic periods. Both companies have a very similar footprint in terms of number of stores in operation, although Dollar General has been growing its store count more aggressively recently. Curiously, Dollar Tree operates on a much smaller employee base of only about 56,000 workers vs. my estimated 129,000 for Dollar General.

Source: DM Martins Research, using data from company reports

On recent financial results, both companies have been producing outstanding top-line figures — despite the recent increase in disposable income that could have suggested discount stores would fare a bit worse during periods of economic strength. Likely driven by a more aggressive footprint expansion, Dollar General is expected to deliver more robust revenue growth in the coming year. On profitability, both retailers boast similarly healthy gross and op margins of about 31% and 9%, respectively — relatively rich, despite being in the low-ticket consumer product retail business.

Source: DM Martins Research, using data from company reports

Outside the P&L, Dollar General’s balance sheet and cash flow statement look a bit better than those of Dollar Tree. The Tennessee-based company is less indebted than its peer by a good margin, while it was able to produce stronger free cash flow in the past year. It is perhaps not surprising that Dollar General is the only one of the two to pay dividends, and it has done so by distributing less than a quarter of its 2017 free cash to shareholders.

Source: DM Martins Research, using data from company reports

In terms of efficiency, Dollar General once again appears to come out ahead. The retailer produces more revenues both on a per-store and per-square foot bases. The same, however, can not be said about the per-employee output.

Source: DM Martins Research, using data from company reports

Finally, on the stocks, DG and DLTR seem to tie on valuation: the former is cheaper on a forward P/E basis, while the latter comes out ahead in PEG and price-to-book terms. Both shares are off their 52-week highs by more than 10%, but DLTR looks a bit more de-risked after taking a big hit (arguably unjustified) following the release of its 4Q17 results.

Source: DM Martins Research, using data from company reports

Last few words

As I had mentioned in the beginning of this article, my goal here was to face off these two leading discount retailers and try to assess which stock might seem like a better buy at first glance. Looking at the numbers above and judging from what I saw when it reported its fourth quarter numbers, I currently have a preference for DG. It seems to have the best combination of growth, balance sheet robustness, strong cash flow generation and reasonable share price.

I would like to hear from you now. Which stock do you believe is a better bargain? Share your opinion in the comments section below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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1 Simple Rule Separates Successful Leaders From Those Destined to Fail

Over many decades of advising leaders of growing companies, certain patterns emerge. Perhaps the most powerful is what I call “the Rule of One.” Simply put, the Rule of One is this: whenever you find yourself believing or acting as though any “one” thing, person, idea, time, formula, or form of value is all-important, it’s the surest sign that you are missing the bigger picture and, along with it, the threat or opportunity at your doorstep.

3 Fictions, 1 Rule

The Indispensable Person. The Rule of One is forged by a series of fictions. The first concerns the so-called indispensable person, the one who if lost, it’s believed, would irreparably wound the entire organization. Though you’d think otherwise, generally it isn’t the leader who’s cast in this light. More often it’s the software engineer with the valuable coding skills, or the salesperson with the storied network of connections. Many times it’s simply the person who’s done a job for so long that no one can imagine it getting done without that person.

But the truth is blunt: no one is indispensable. No doubt there can be bumps when someone quits or is fired. But even in small firms, the parade marches on. Those that remain soon discover they’re invested not in the indispensable person, but in the place they work, and therefore highly incented to see it adapt and succeed far beyond any “one”. Abraham Lincoln once remarked that he was more concerned with losing 100 horses than a general, no matter how good the general. He wasn’t just honest–he was wise.

The Big Idea. But the Rule of One’s relevance isn’t limited to people. Consider ideas. In hindsight, a great idea is too easily seen as immaculately born and immediately valuable. We’re drawn to such fictions by the fairytale hope that there’s such a thing as lightning-bolt brilliance or solutions that suddenly drop from the sky. The truth is far less heroic and far more pedestrian.

Big, creative, market-moving ideas are the result of a gradual accumulation of many smaller ideas. Breakthrough ideas ripple across time, as Where Good Ideas Come From author Steven Johnson says, rather than occur in an enormous rogue wave from out of nowhere. More than speculate, Johnson in fact tracked the major human advancements over several centuries to verify this pattern of one small idea linking to a web of other small ideas, and only appear as a single big idea in the rear view. My past three decades of work and research with hundreds of growing ventures has shown the same pattern.

The Perpetual Leader. Every now and then the myth of the indispensable person is tied to the person at the top, and nearly all such instances involve leaders who also happen to be founders. Founders represent a unique amalgam of many forms of the Rule of One all wrapped up in a single person. Periodically there are founders who are seen, or see themselves, as the cornerstone of the organization and the fountainhead of ideas. And the fact that their ventures wouldn’t have been started without them can make both things appear to be true. But as research by author Noam Wasserman (author of The Founder’s Dilemma) has shown, by the time a venture is three years old 50 percent of founders are no longer in charge, a cliff-like decline that continues to plummet by upwards of 10 percent every year thereafter. Even founders aren’t “the one” forever.

Tellingly, most founders are in fact forced to step down and shocked when asked to relinquish control. How, they wonder, could anyone not see that they are “the one”–the one with the vision, the desire, and the tenacity, and therefore the one best to lead? But the Rule of One teaches that there is no “for-all-time” for anything. There is only “this” time, at this moment, with its own unique variables, needs, and opportunities. The trick is to perpetually search for and allow the optimal mix of person, idea, market, method, and more. When you find yourself believing otherwise, it’s the surest sign that it’s time to think again.

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British prime minister very concerned by Facebook data abuse reports

LONDON (Reuters) – Britain is very concerned by allegations that the British data firm Cambridge Analytica exploited data on millions of Facebook users without their authorization in election campaigns, a spokesman for Prime Minister Theresa May said on Monday.

FILE PHOTO: A picture illustration shows a Facebook logo reflected in a person’s eye, in Zenica, March 13, 2015. REUTERS/Dado Ruvic/Illustration/File Photo

The chairman of parliament’s Digital, Culture, Media and Sport Committee also alleged that Cambridge Analytica Chief Executive Alexander Nix had “deliberately misled” his committee during testimony about its use of Facebook data two weeks ago.

The New York Times and the British Observer newspaper reported on Saturday that the political analytics firm had harvested private data on more than 50 million Facebook users to support Donald Trump’s 2016 presidential election campaign. (

Facebook said in a statement on Friday that it had learned in 2015 that a Cambridge University psychology professor had lied to the company and violated its policies by passing data to Cambridge Analytica from a psychology testing app he had built. Facebook said it suspended the firms and researchers involved.

“The allegations are clearly very concerning,” May’s spokesman told reporters on Monday. “It is essential that people can have confidence that their personal data will be protected and used in an appropriate way.”

Parliamentary committee chairman and Conservative lawmaker Damian Collins said on Sunday that Facebook had avoided answering straight questions from the committee about what it knew about the abuse of its users’ social media data by Cambridge Analytica.

“Someone has to take responsibility for this. It’s time for Mark Zuckerberg to stop hiding behind his Facebook page,” Collins said in a statement.

He also said he would be contacting Nix to answer further questions raised by the media reports.

A 3D-printed Facebook logo are seen in front of displayed binary digits in this illustration taken, March 18, 2018. REUTERS/Dado Ruvic/Illustration

Cambridge Analytica and its CEO were not immediately available to comment.

Nix testified before the parliamentary committee on February 27 that Cambridge Analytica carried out advertising campaigns and conducted opt-in surveys on Facebook to collect data on users’ political attitudes on behalf of its campaign clients.

“We do not work with Facebook data, and we do not have Facebook data. We do use Facebook as a platform to advertise, as do all brands and most agencies, or all agencies, I should say,” Nix told the committee.

Britain’s Information Commissioner’s Office (ICO) said over the weekend that it would be considering the potential new evidence as part its separate civil and criminal probe into whether Facebook user data had been abused in British elections.

Ten months ago, the ICO, Britain’s data protection watchdog, launched a probe into the use of personal data in British political campaigns.

It said over the weekend that it was already considering the nexus of connections between Cambridge Analytica, its parent Strategic Communication Laboratories (SCL) and Cambridge University professor Aleksandr Kogan, author of the testing app.

“Any criminal and civil enforcement actions arising from the investigation will be pursued vigorously,” said Information Commissioner Elizabeth Denham.

European Union lawmakers will also investigate whether the data of more than 50 million Facebook users has been misused and whether the massive trawling of data included EU citizens, said Antonio Tajani, president of the European Parliament.

Facebook’s highest ranking executive in Europe, Vice President Nicola Mendelsohn, appeared on stage at the Advertising Week Europe conference in London to interview pop star Nicole Scherzinger, but declined to take questions from reporters.

Reporting by Eric Auchard, Elizabeth Piper, Andrew MacAskill in London, Alastair Macdonald and Foo Yun Chee in Brussels; Editing by Kevin Liffey

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