The Bulls Leave The Building: Piper's Murphy Downgrades Fitbit

Piper Jaffray's Erinn E. Murphy

has downgraded the rating on the company from Overweight to Neutral, while lowering the price target from $24 to $14. The company's Q4 results and Q1 guidance missed expectations. "We were surprised to the downside of the Q1 "miss" and in this market environment, we struggle to recommend a stock where almost the entirety of FY16 earnings are weighted in the final three quarters," Murphy stated. Murphy also believes that there is limited visibility into new product replenishment during Q2, the tougher year on year comp in Q2 and the 2016 holiday season. "While there are long-term positives around FIT's role in the digital health arena, some of these benefits are still intangible and we need to see better visibility on sell-through of new product and consumer engagement," the analyst mentioned. Murphy explained that increased expenses were offsetting profitability in Q1, and although the increased marketing could help with fuel replenishment during Q2, the impact can only be estimated further into the sellthrough season. On the other hand, Murphy said that some of the Q4 items were encouraging, such as the inventory improvement during the quarter, the planned gross margin expansion for FY16, acceleration in paid active user engagement and the longer term potential in digital healthcare. The EPS estimates for Q1 and FY16 have been reduced from $0.28 to $0.02 and from $1.20 to $1.04, respectively.