Deutsche Bank Comments on Fitbit's (FIT) Second Quarter, Raises PT
Deutsche Bank reiterated a Buy rating on Fitbit (NYSE: FIT) and raised its price target to $52.00 (from $50.00). Comments follow the release of the company's Q2 results. Analyst Ross Sandler noted positives including revenue and unit growth, but noted concerns in a few areas including gross margins.
"Fitbit reported revenue and EBITDA that were meaningfully above our conservative estimates, but importantly, revenue and unit growth reaccelerated 80% (ex-fx) and 14% respectively from last quarter, off a pretty sizeable base. For Fitbit to hit $2.00 in EPS, it needs to sell around 36m units at the current ASP, which could happen in 2016 or 2017, well ahead of our original forecast. We have raised our 2016 revenue and EPS by 19% and 27%, and our price target is now $52, up from $50," said Sandler.
"Fitbit’s 2Q results exceeded our expectations for device shipments, ASP, revenue, EBITDA, and EPS – a clean sweep. The company sold 4.5M devices in the quarter, ahead of our estimate of 3.9M. Revenue growth reaccelerated 75ppts from 1Q to 253% y/y (ex-recall). Increased production capacity for the Charge HR, benefits from Fitbit’s expanded marketing program, and continued success in the company’s global rollout all contributed to the reacceleration. What’s more, these factors are likely to persist looking forward, and the forecast doesn’t include upside from new products which could happen for 4Q or from additional marketing. Lastly, adjusted EBITDA margins in the quarter were 21.5%, topping our estimate and showing that the company can deliver profitability while investing in sales and marketing and R&D, coming in only 350bps below its long term goal," continued the analyst.
Sandler added, "We see few areas to be concerned about in Fitbit’s 2Q15 results. One issue was that gross margins were 47% in the quarter, down more than 300bps y/y and q/q. While this beat our expectation of 46.7%, we believe that 47% was below what many investors were expecting. Management attributed lower gross margins to FX, a higher mix of new products, and costs associated with ramping production capacity. While FX is out of Fitbit’s control, the company should be able to reduce costs and improve yields on new products over time and adding production capacity is not an ongoing event. We are expecting gross margins to improve modestly looking forward."
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Shares of Fitbit closed at $51.64 yesterday.