Why Fitbit Is 'Not The Right Fit'; Pacific Crest Downgrades

Pacific Crest’s Brad Erickson has downgraded the rating on Fitbit Inc FIT to Sector Weight, based on the company’s lack of leverage, risk of hardware commoditization and weak user metrics.

“Multiple expansion opportunities from corporate wellness are becoming more limited, in our view, and despite the sell-off, fundamental downside risk remains, which does not justify the risk/reward,” Erickson explained.

Among the primary reasons for the downgrade are recent channel checks that suggest that any fundamental upside would be insufficient to change the bear stance on the stock. In addition, there appear to be limited opportunities for product and sensor differentiation for Fitbit, at least in 2016.

Related Link: Fitbit Fatigue: Analysts Sees 50% Downside

Erickson also believes the company’s gross margin might have peaked, while the weak active user trends “can no longer be ignored.” The analyst also expects limited growth opportunities for Fitbit in Europe.

The revenue and EPS estimates for 2016 and 2017 have been lowered slightly, based on lower ASPs mitigating the impact of marginally higher units, and higher spending and lower gross margin likely to be partly offset by a lower tax rate.

“We need more confidence in defensibility of Fitbit's consumer business to almost inevitable pricing headwinds and the company's ability to monetize from software and data in corporate channels versus hardware sales,” Erickson added.

Shares of Fitbit were down more than 14 percent at $14.10 in Tuesday's pre-market session.