There are two reasons why Fitbit Inc. (NYSE:FIT)’s shares are up 25% year to date. First, the company’s revenue is growing rapidly. The company’s latest quarterly revenues increased 252% year over year and its non-GAAP earnings rose 133% year over year. Second, analysts think the Fitbit’s fast growth will continue. They have a consensus earnings estimate of $0.97 per share next year, up from $0.25 per share in the trailing twelve months. But while Fitbit shares are up, investors should be cautious. GoPro Inc (NASDAQ:GPRO)‘s shares show the perils of buying the stock of fast growing hardware companies at high multiples. Let’s examine Fitbit in depth and see how the smart money thinks of the company.
We mention the hedge fund activity concerning Fitbit because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated a double-digit alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (118% return vs. the S&P 500’s 57.6% gain) over the last 37 months (see the details here).
Some investors see a parallel between Fitbit Inc. (NYSE:FIT) and GoPro. Both are fast growing hardware producers. Both companies’ addressable market sizes are huge. Just as GoPro rallied after its IPO, Fitbit shares have rallied after its initial public offering too. However, while GoPro shares have tanked since and have fallen below their initial day close price, Fitbit shares are still comfortably higher than its initial day close. Although Fitbit shares haven’t fallen on fears of commoditization as GoPro shares have, it may be just a matter of time as other larger tech companies such as Apple and Xiaomi also target the wearable tech market.
There is a way forward for Fitbit. Apple Inc. (NASDAQ:AAPL) was basically a one-product hardware company a decade ago. But because it had great leadership and a rabid fan base, Apple quickly became so much more than just an iPod producer. If Fitbit spends its research and development wisely and produces innovative wearable products that consumers want, Fitbit shares can do well.
Hedge funds seem to be underweight Fitbit Inc. (NYSE:FIT). Of the around 730 elite funds we track, 27 funds owned worth $249.92 million of the company’s stock (representing 3.20% of the float) at the end of June. This compares to the 33.9% of the float that is short. John Griffin‘s Blue Ridge Capital owns 3.5 million shares, while Chase Coleman’s Tiger Global Management LLC owns 500,000 shares. Daniel Benton’s Andor Capital Management owns 350,000 shares too.