Why a hot holiday item may be a gift to your portfolio
One of this year's hottest holiday gifts may also give your stock portfolio some sparkle.
That's the argument from Barclays analyst Matthew McClintock for buying shares of Fitbit (FIT), the technology company that's known for its step-counting watches that cost from about $50 to $200.
Fitbit is part of one of the most popular gift categories this holiday season -- wearable technology -- and the company is poised to see "meaningful sales" during the next few weeks, McClintock wrote in a Monday research report, which upgraded the shares to "overweight" from "equal weight." Overweight and equal weight are the equivalent of "buy" and "hold."
Fitbit's stock price hasn't been exactly healthy since the company sold shares to the public in June. Before gaining in Monday's trading after the Barclays upgrade, the stock had been down 4.6 percent, underperforming the S&P 500, which dipped 1.7 percent during the same period. But Fitbit's struggles in the stock market aren't justified, McClintock wrote, noting strong holiday sales and new products and corporate wellness deals.
Fitbit "also dominated wearable marketing efforts for the holiday from our observations," he wrote. "While we expect meaningful sales upside from holiday strength, we are even more optimistic about the potential networking-effect benefit that should occur in 2016 from user growth related to these sales."
Other analysts are also jumping on the Fitbit wagon, with Stifel analyst Jim Duffy reiterating his "buy" on the stock and noting that consumers are snapping up wearable tech this holiday season, according to Barron's.
One reason for the stock's weak performance since its IPO has been concerns over the competitive landscape, given Apple's introduction of the Apple Watch and competition from the likes of Garmin and Chinese smartphone maker Xiaomi. Still, Xiaomi's products aren't yet available at any big U.S. retailers, while Fitbit has continued to gain market share despite the rival products vying for consumers' wallets, McClintock noted.
So why does McClintock think this holiday season will be jolly for Fitbit? First, retailers including Target (TGT) and Kohl's (KSS) reported strong growth of wearable technology items in the third quarter. Next, Google Trends has found that search activity for "Fitbit" has grown sharply ahead of the holiday season. Lastly, McClintock said his research found Fitbit devices are discounted less than competing devices, which indicates a "powerful" Fitbit brand, while retail workers told his team that consumers are exchanging other wearables for Fitbit devices, such as the popular Charge HR, tracks a user's heart rate and activity and sells for around $120.
"Furthermore, our discussions lead us to believe that most consumers at Target came in specifically requesting Fitbit products," he noted. "At Target specifically, our checks indicate that the Charge HR was a big seller over the weekend. At Walmart.com, our channel checks indicate that Fitbit Charge HR was sold out by 10 a.m. on Black Friday."
Investors, though, have been much more skeptical of newly public technology companies, wanting to see some real financial results before buying into the hype. Other tech IPOs this year have performed even worse than Fitbit, such as crafts-marketplace Etsy (ETSY), whose stock is down almost 70 percent since its first offering.
Still, Fitbit has a few things going for it that some other tech companies don't. For one, it's profitable. Secondly, it's one of the fastest-growing businesses among the consumer companies covered by Barclays, the report noted.
"We do not expect any meaningful challenges to the market share dominance of Fitbit over the next few years, and have an upside case of $6 billion in revenue by 2018," McClintock added, compared with a projected $1.8 billion for 2015. "Fitbit appears to be cheap relative to its growth prospects, its market share dominance, and secular industry tailwinds."