Earnings preview: Fitbit needs to sustain profits in Q4

Shares of Fitbit (FIT) have gained about 26% so far this year and investors are keeping their fingers crossed for a further boost when the company reports fourth-quarter financial results on Wednesday, February 27, after the regular trading hours. The market is looking forward to a stellar quarterly report, similar to what it posted during the third quarter.

For the fourth quarter, Wall Street is expecting revenue of $567.6 million, driven by its new line of products including Versa, Ace and Charge 3. The California-based firm is projected to once again report a profit, this time of around 7 cents per share.

During this holiday quarter, Fitbit has projected unit sales of 5.1 million devices, compared to just 3.5 million in the third quarter. Over the last year, new products have accounted for almost two-thirds of its total sales.

Recent studies have shown that the US smartwatch segment is rapidly growing, with Apple (AAPL), Fitbit (FIT) and Samsung accounting for almost about 88% of unit sales. Meanwhile, this does not necessarily mean higher sales for Fitbit in the coming quarters. Of course, the company will benefit from market expansion, but the rising competition in both the high and low-end markets should worry Fitbit.

Fitbit had earlier bowed out to Apple and Xiaomi as the leading smartwatch seller. The iPhone maker has continued at the top spot unbeaten since then in the high-end market. Meanwhile, Garmin (GRMN), Jawbone and Chinese tech firms including Xiaomi have been offering strict resistance to Fitbit sales in the low-end market.

Last week, Garmin had reported a 4% increase in its quarterly revenue, better than what the analysts had expected, sending its shares up 7%.

Fitbit’s increasing focus on the wellness sector is expected to pay off to some extent this quarter. Though a smaller unit accounting for just about 10% of its overall revenue, the Health Solutions segment has been seeing robust growth over the past few quarters. During the last reported quarter, this segment saw a 26% improvement, and investors will be looking at whether the company is able to sustain this performance.

The stock has gained 21% in the trailing 52 weeks. There have been numerous instances over the past couple of years when the stock has made some steady gains, but on none of these occasions, the company was able to sustain it. Within a span of just about six months, the stock would tumble.

Last reported quarter

In Q3, Fitbit posted a slight improvement in revenue of $394 million from last year’s $392.5 million, beating the street estimates. Adjusted earnings were $0.04 a share, higher than the market projection. The stock was more than 10% up immediately following the results.

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