Fitbit Inc FIT's third-quarter earnings report demonstrated that the company manage to improve its profitability through higher sales and marketing efficiency, Morgan Stanley's Yuuji Anderson said in a research report.
Fitbit reported a revenue of $392.5 million in the quarter and a 1-cent per share loss in the third quarter, which exceeded the analyst's expectations of $391.4 million and a 4-cent per share loss. The company also reported a gross margin improvement and lowered its operating expenditure which helped reduce cash burn.
Looking forward to the release of Fitbit's fashion watch called Ionic, management is taking a cautious approach through a lean inventory level, the analyst wrote. The company is likely to achieve a conservative target of selling one million units in the fourth quarter and any upside in the fourth quarter or following quarter would be dependent on the demand ramp into the holiday season.
If Fitbit sees strong sales of the Ionic watch, it will mark the first step towards "regaining product cycle momentum," Anderson said. But success in subsequent product cycles will depend on the company improving its products features and the overall ecosystem.
Despite several improvements in Fitbit's third quarter and expectations for at least an in-line product launch, the analyst remains cautious on Fitbit's stock and maintains an Equal-weight rating with an unchanged $7 price target.
"We can turn more positive should holiday sell-through improve more than estimates anticipate while we could turn more cautious if initial Ionic receptivity proves to be pent up demand and limited to early adopters," Anderson also said.
A $7 price target represents a 0.6x multiple on estimated fiscal 2018 earnings which is "appropriate for a challenged hardware company" like Fitbit.
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