It was a good day for Fitbit (FIT) shareholders yesterday and one that could not come soon enough. In recent trading sessions, shares of FIT had been pummeled to new trading lows below $5.50 a share.  The reprieve for the share price that came in Thursday’s trading session came by virtue of its hardware device manufacturing peer GoPro (GPRO). 

On Wednesday, after the closing bell, shares of GoPro rose sharply with the action camera maker updating its guidance for the Q1 2017 period as follows: 

Today we are updating revenue guidance for the first quarter of 2017. We now expect to deliver revenue in the upper end of our guidance range of between $190 million and $210 million," said GoPro Chief Financial Officer, Brian McGee.  "We currently have no need to draw on our credit facility and we expect to be EBITDA positive for full-year 2017."

Along with GoPro’s revenues and certain financials updated, the company has offered cost reductions and restructuring charges to take place.  These actions, while warranted and beneficial to shareholders over the mid-term, will likely prove moot over longer periods of time.  GoPro’s fundamental investment thesis is still troubled by the product line itself, which has offered to be aimed at and addressing a very niche market place. As such, while management’s actions are seemingly beneficial for the company and its share price, I would be of the opinion they are both fleeting.  Nonetheless, investors cheered the update from GoPro and rewarded the share price with a double-digit percentage rally as well as the FIT share price with a 7% upswing.

When the news broke from GoPro in the after hours on Wednesday March 15, 2016 I understand from experience that the GPRO positive share price sentiment would find its way to FIT shares. With that understanding I offered to StockTwits participants the following:

Hardware stocks, especially those offering a singular product category, tend to trade with similar sentiment and along a similar trend line over time.  In years past, this was exampled in stocks like SodaStream (SODA) and Keurig Green Mountain (GMCR).  Like business models garner like sentiment.  And that is what you have with Fitbit and GoPro, like business models. Both companies are hardware-centric with virtually no recurring revenues and generating the vast majority of their revenues from a product line designated for a singular category of sales. As a shareholder, like it or not, agree with it or not, the chart simply doesn’t lie.

Eerie isn’t it?  But having this knowledge base can certainly benefit both GPRO and FIT shareholders over time.  As a Fitbit investor who is currently underwater with that investment, I look for opportunities to execute a trade in order to reduce my cost average on the investment.  With GoPro’s updated guidance I took action and added a significant position of FIT shares in the after hours on March 15, 2017.  Looking for nothing more than a quick trade, I was able to benefit from the surge in FIT shares on March 16, 2017.  Moreover, and as I had offered to StockTwits participants, my forecast for shares to rise above $6 was met as well.  But now that is in the past and investors will have to wait and see what happens next, right?

The FIT share price surge was a nice relief rally and allows for some investors to take a deep breath.  Having said that, nothing changed for Fitbit and as such the share price will likely continue to meander between its low trading price and a share price that exhibits a discount to cash and its future potential/possibilities.  In other words, it’s unlikely that momentum will take hold of the share price, elevating it upwards and expressing multiple expansion.  If FIT shares get stuck in a trading range between $5.50-$7.50, investors should find multiple opportunities to trade within that channel. 

The cold hard facts surrounding GPRO and FIT shares is that these companies are limited by their business models, which limit themselves to singular product categories and the dreaded “one and done” consumer purchase.  That’s the sentiment, that’s what drives outsized short interest and that’s ultimately what suppresses the share price over time.  And despite the many offerings from both companies to move into other areas of business, the core business is the driver of revenues. This is something very much expressed by GoPro’s CEO during a CNBC interview that aired alongside the updated Q1 2017 guidance.  Where GoPro has tried different ways to enhance its business and reach into different areas of the consumer market, it has found itself in a position where it realizes the need to narrow the focus along the lines of its core action camera business. 

Fitbit has also offered to investors a plan to diversify and/or transform its business from a hardware-centric model to one that is oriented around the notion of digital health.  Like GoPro, however, the transformation will not be able to offset the shortcomings in its core business.  Simply put, the core business is too big and any new revenue stream initiatives aren’t able to scale quickly enough to produce incremental revenues and profits.  A similar example of this thesis can be reviewed in the retail brick and mortar business whereby the major department store retailers have all been diversifying their business to meet the needs of the consumer.  Big-box retailers have been investing billions of dollars on their digital and mobile e-commerce businesses for years, but none have been able to scale this business segment quickly enough to offset their traditional brick and mortar revenue declines. Some of these retailers are growing their online sales at a 30%+ annual clip…and it still just isn’t enough. So as an investor, when management offers the infamous “we’re doing this and we have plans to do that”, understand this and that take ample time to develop and don't generally offer anything meaningful to metric results. 

In looking at both Fitbit and GoPro one should realize by now that the term fad doesn’t apply, but rather it’s the typical characterization for hardware-centric business models.  When they’ve saturated the market place, sales and revenues 100% of the time go into steep decline.  And don’t get me wrong, as I understand both companies are working on their software, code and logic.  All of which have limited potential to benefit the shareholder any time in the mid-term.  I’d almost rather management spend time developing the next hit product, even as that may require more heavy lifting.  But getting back to the main point and comparing Fitbit and GoPro. When I review these similar business models I walk away with the most glaring distinction.  Fitbit has a much larger opportunity than GoPro. But that’s not even Seth Golden talking; that is the number of units sold over the last 3 years talking for both of these companies’ product lines.  Fitbit has a larger addressable market than does GoPro. It really is just that simple and very much proven.  GoPro is not just limited by the utility of its product, but by the pricing model of its product line.  Fitbit is somewhat advantaged by its pricing model in that respect, even as the utility of its product is equally limited.  Certainly on both sides of the investor bias, folks are likely cringing at this verbiage as it forces investors to consider the utility of these products/devices.  So in the interest of keeping it simple ask yourself a simple question: “Who absolutely needs a Fitbit fitness tracker or a GoPro action camera”?  And then, then go back to the chart displayed above.  The answer to that question becomes quite obvious. 

Fitbit and GoPro have their work cut out for them.  GoPro is ahead of Fitbit presently with regards to having previously found a saturation point and expressing the bottoming of results.  Fitbit, in that regard, will be expressing such results in the current fiscal year.  But the end goal is the same for both companies:  Bottom and return to very modest growth, if even 1-3% growth in 2018.