Cleveland Research: Fitbit Could Grow, But Lock-Up Expiration Is Concern

• Fitbit Inc FIT shares are up 11.19 percent year-to-date, and touched a high of $51.64 on August 4.
• Cleveland Research’s Ben Bollin initiated coverage of the company with a Neutral rating and a price target of $38.
• An improving product mix and better market for wearables are expected to benefit the company in the near future, although several headwinds remain, Bollin said.

Fitbit is poised to benefit from the significant growth anticipated in the wearables business, especially in activity trackers, over the next several years.

“Device feedback continues to suggest potential upside through 2H15 and into FY16; currently assuming 20M units in FY15 (+84% Y/Y) and see potential upside to the 22M unit range (+100% Y/Y),” analyst Ben Bollin wrote.

The company is also expected to benefit from “richer product capabilities vs peers & strong brand recognition,” Bollin said. An improving product mix and increased usage rates of new products also bode well for the company’s future performance.

Ongoing investments in Operating expenditure, uncertain operating margin leverage from current levels and the looming share lock-up expiration in December could, however, restrict Fitbit’s performance in the next several quarters, the Cleveland Research report said.

Bollin noted that a share lock-up expiration six months following the IPO will result in a large number of shares hitting the market on December 15, 2015. The company’s current shares outstanding total about 248 million, with around 42 million shares floated currently.

“The potential for increased competition remains an ongoing challenge with entrants pursuing all price bands of the market,” Bollin added.