If you want a misleading headline to take a stock higher, the recent power rankings in the Apple (AAPL) app store just produced such an occurrence.Over the holidays, Fitbit’s (FIT) app was the number 1 downloaded app for a brief period and before falling a few notches. The ranking is extremely misleading, as many believe the number of Fitbit app downloads translates directly to stronger sales, stronger than current analysts estimates at least.There’s a huge problem with drawing such a conclusion and its something that every consumer product good is correlated to through the product lifecycle… average selling price or ASP as it is known.

Fitbit has already dramatically lowered FY16 revenue estimates to exhibit around 25% revenue growth. This is lower than the 38% growth formerly offered and near 40% modeled by analysts up until Q3 2016 reported results. Fitbit’s management team grossly misguided market expectations and grossly exaggerated the total addressable market for their devices. This has lead to a huge decline in metric guidance, metric expectations and the price per share for FIT.So when a headline like the one that hit the newswires recently surfaces, take the opportunity to swing trade, knowing there is much more than the headline offers. 

The number and power ranking related to Fitbit app downloads does not detail the ASP. The power ranking does not detail retail inventory levels and it definitely does not detail the replenishment/orders placed by retailers. All of these variables are critical to understanding whether one should dedicate new, long-term capital to FIT shares or take the swing trade and wait for greater quarterly results to be reported.Some of the information needed is visible in the marketplace and has been throughout the holidays. The ASP has been cut throughout the Q4 2016 period as reported by NPD Data Group and by roughly $10 per device. The former Charge HR model had been selling for $129 post the launch of the new Charge 2 since Q3 2016.But since December, the device dove below $90 ASP.The Blaze and Alta have also been reduced in price during the holiday period.This examples two glaring problems I previously reported about the Fitbit hardware business model that has virtually no recurring revenues.In the article titled “Understanding The Typical Growth And Declines For Hardware Providers” I explain exactly what to expect from such a business model.It is unfortunate that history, once again, has proven to repeat itself as I’ve outlined. 

The first problem being that these devices don’t sell quickly at retail; this means the sell-in to retailers is much more abundant than the sell-through from the retailer to the consumer. Retailers have sat on way too much inventory for extended periods of time and need to take a price reduction on goods.Fitbit must issue a credit to the retailer for this discount, the retailer doesn’t take the brunt of the discount. The second problem with the business model is once market saturation takes hold for a consumer good such as Fitbit devices, the demand slows that much more and the ASP must come down. This occurrence results in lesser sales and lesser profits. It happens to every hardware company as proven by history. Unfortunately, it is happening to Fitbit more quickly than assumed at the start of 2016. There is actually one more problem more specific to Fitbit’s business model that is more extreme than some of its peers and that is the rate of attrition. Fitbit’s two-year attrition rate, as reported in Fitbit’s metric results was 48% as of January 2016. The 12-month attrition rate is roughly 42 percent. This means for every unit sold, nearly half of devices are not used again after 6 months. This also means that a greater portion of the addressable market has been eliminated through core usage factors. As a non-essential good, Fitbit devices don’t generate the same kind of repeat purchase that say a coffee maker might see.

Where millions of people around the world will buy a new coffee maker once their old one either goes out of style or breaks because they “need” that coffee fix, a fitness tracker is less likely to find a repeat purchase because it is a non-essential good/device. This has been proven through Fitbit’s attrition rate and revenue growth rate deceleration that has occurred in each consecutive year since 2014. 

With the ASP sharply lower during the holiday period, it is likely that Fitbit sold more units YOY, especially since they have a greater distribution network to support demand.But again, increased sales does not always correlate to greater profits. This is not to say that the sales won’t meet or beat lowered expectations for the Q4 2016 period, but rather it suggests don’t be the investor that “cares”. In the grand scheme of things, what has to happen for Fitbit is they have to show better results in 2017 to sustain an upward trend in the share price.I don’t see this as a great possibility for Fitbit as I will logically explain.

Analysts’ average estimates have come way down for 2017, as I suggested they would months ago.  I had warned investors repeatedly that the company would not be able to achieve the analysts’ modeled 16% revenue growth in 2017. With Fitbit lowering this year’s forecast, analyst have revisited their 2017 models for revenues and earnings to elicit just 3% revenue growth and earnings roughly 40% lower than in 2016.Do I have an issue with the analysts’ revised estimates; I certainly do! 

The estimate for revenue growth doesn’t make a lot of sense when juxtaposed to Q4 2016 revenue estimates. The 4^th and 1^st quarters of the year are high replenishment quarters after the gift-giving season. With the average analyst estimate for Q4 2016 revenues modeling just 4.3% growth, how does Fitbit achieve any growth in 2017? 

The global market has proven to be saturated with Fitbit goods, North America especially and where greater than 75% of the company’s revenues are being generated. North America is likely going to exhibit sales declines in 2017 for which any international growth will not be able to fill the gap from N. America. Secondly, the ASP will remain under pressure and express lesser profit. Third and most importantly, any new iterations will be meeting lesser demand via market saturation definitions, thus fewer orders from retail partners as is always the case post-market saturation for hardware products. This is especially true if those hardware products are non-essential goods. Lastly, the company is up against a huge iteration cycle come Q2 2017 where they will anniversary the launch of Blaze and Alta. The Blaze has languished since it launched earlier this year and retailers simply won’t find themselves in the same situation they have found themselves to be in this year with the “smart fitness watch”.In general, retailers are done giving the smartwatch category a chance.Smartwatches simply don’t resonate with consumers.

The price points for these devices that have needless applications and are largely offered by the smartphone have proven to be too high. Even Apple’s Apple Watch has failed to generate YOY sales growth after just the first year of sales; this is a first for any Apple product since the launch of the iPod. But back to the point concerning revenue growth estimates for 2017. As I have state for many months regarding this year’s revenue growth, keep an eye on analysts’ estimates for revenue growth in 2017 as I believe they are still overly optimistic and will be revised further. Fitbit would be wise, for the sake of the share price near-term, to offer a range of 1-5% revenue growth in 2017. But if they were to be honest and/or accurate, they would offer -3-1% revenue growth in 2017. 

Fitbit either needs to continue on its current path whereby they dominate the wearables market and find sales and earnings bottoming over the next 18 months or develop products for entirely different categories.Over the next 18 months, the market will consolidate further around one or two key brands akin to the way it has around single-serve coffee makers and soda makers i.e. Keurig and SodaStream (SODA). Once the fear from market competition is found baseless and results bottom, the multiple for FIT shares can appreciate that much more. The story for Fitbit is not over, not by a long shot.These stories take years to develop and reach true valuation.Currently, Fitbit is a victim of its own success and its business cycle that needed to publicly take shape. At $8 a share FIT is not anymore fairly valued than it was at $20 or $40 a share, especially when compared to peers like SodaStream and GoPro (GPRO). The true value will reveal itself when all the surrounding noise alleviates and the company achieves its true long-term sales and earnings path that will offer modest sales and earnings growth with intermittent new product revenue spurts.It’s for this reason that I’m buying shares at current levels and remain a long-term investor.Akin to knowing how these hardware companies trough post-market saturation, history proves they always rebound over time.