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Fitbit Face-Plants After Giving Weak Q1 Guidance, User Numbers

Fitbit ( FIT ) stock fell off the treadmill Tuesday, a day after the maker of wearable fitness devices reported better-than-expected fourth-quarter results, but guided Wall Street much lower than expected for the current quarter. Fitbit shares were down 19%, near 13.40, in midday trading on the stock market today , and at least five investment banks downgraded their rating on the company. Fitbit stock hit its all-time low of 12.90 on Feb. 11, after the company went public in June at 20 a share and peaked in August near 52. Several analysts downgraded the stock or cut their price targets after the San Francisco-based company late Monday posted Q4 earnings and gave Q1 and full-year 2016 guidance. In Q4, Fitbit earned 35 cents a share, excluding items, on sales of $712 million. Non-GAAP earnings per share rose 67%, and sales jumped 92% on a year-over-year basis. Analysts polled by Thomson Reuters expected 25 cents ex items on sales of $648 million. But for the current quarter, Fitbit is targeting non-GAAP earnings per share of 1 cent on sales of $430 million, at the midpoint of its guidance range. Analysts were modeling 23 cents and $485 million. Fitbit’s New Products Out In March Fitbit Chief Financial Officer Bill Zerella said Q1 is a product transition quarter, with the launch of the Fitbit Blaze smart fitness watch and Alta fitness wristband in March, as well as the discontinuation of the Fitbit Charge. Fitbit expects to incur higher sales and marketing expenses because of the global product launches, plus additional manufacturing expenses to maximize production of the new products. Piper Jaffray analyst Erinn Murphy downgraded Fitbit stock to neutral from overweight and slashed her price target to 14 from 24. The outlook for Fitbit’s new products is cloudy, and the company faces tough year-over-year comparisons in the second half of the year, she said in a research report. Pacific Crest Securities analyst Brad Erickson downgraded Fitbit stock to sector weight from overweight. He cited the risk of hardware commoditization and poor user metrics as reasons for the change. “We see little likelihood of dispelling anytime soon the longer-term bear thesis of slowing growth, pricing pressure and longer-term commoditization,” he said in a report. Fitbit is looking like the next GoPro ( GPRO ), a hardware company facing market saturation, slowing growth and margin and earnings erosion, he said. Erickson is also concerned about active-user trends. Fitbit added 18 million new registered device users in 2015, of which 13 million, or 72%, were active users at year-end. Erickson says Fitbit stock has a fair value of 14. Cowen analyst John Kernan reiterated his market perform rating on Fitbit stock but axed his price target to 19 from 41. FBN Securities analyst Shebly Seyrafi maintained his outperform rating but cleaved his price target to 25 from 50. Sterne Agee CRT analyst Rob Cihra kept his neutral rating on Fitbit and price target of 18. To turn things around, Fitbit needs to show leverage in the corporate wellness market, improve customer retention, and come out with new products with breakthrough sensors. Despite shipping over 30 million devices in the past two years, Fitbit ended 2015 with 16.9 million active users. “This kind of ‘churn’ is likely just natural and systemic to the health/fitness market, as some Fitbits ending up in drawers seems comparable to well-intentioned health club memberships that don’t get used,” Cihra said in a report. Fitbit faces competition from makers of dedicated fitness products such as Garmin ( GRMN ) and Under Armour ( UA ), but also from makers of smartwatches with fitness features such as Apple ‘s ( AAPL ) Apple Watch.

MWC: Apple Rivals Prep Waterproofing, Dual-Cam, Force Touch Display

Apple ’s ( AAPL ) rivals aim to get a jump on the upcoming iPhone 7 at the Mobile World Congress in Barcelona, strutting out new smartphones with some of the features that have been linked to Apple’s plans. “We find the improvements in rival smartphones — better display, slimmer camera modules, dual cameras, waterproofing, more (memory) and high-speed charging — a preview of the fall iPhone 7 launch,” Jeffrey Kvaal, a Nomura Securities analyst, said in a research report. The  iPhone 7 has been rumored to feature waterproofing for the first time. Apple does not officially take part at the MWC, but the company casts “a lengthy shadow” nonetheless, Kvaal added. Samsung on Sunday rolled out the Galaxy S7 and Galaxy S7 Edge. The handsets boast sleek designs with advanced camera features, water resistance and external memory. Sony ’s ( SNE ) Xperia X Performance also features waterproofing. At Citigroup, analyst Jim Suva wrote:  “While Apple does not participate in MWC, there was no lack of apps, software, and hardware support for the iPhone.  We were surprised that even Apple’s largest competitors commented that Apple is likely working on some very innovative and easy to use future enhancements. Thus the rush to launch competing products before Apple’s big September launch.” According to another Citigroup report, based on observations at the MWC, dual cameras also are becoming a standard feature. LG’s G5 and the ZTE Axon Elite are expected to feature dual cameras as well as new devices from Huawei and Xiaomi, says Citigroup. Apple’s rivals, though, are still playing catch-up in fingerprint security technology, such as its  pressure-sensitive “Force Touch” display, which uses technology known as “haptic feedback.” Citigroup forecasts that 19% of smartphones will use haptic technology in 2016 and 25% in 2017.

‘Melting Franchise’ SanDisk Bad For Western Digital: Investor

Western Digital ( WDC ) investor Alken Asset Management is pushing the disk drive maker to send Apple ( AAPL ) supplier SanDisk ( SNDK ) back to the sales block, and Western Digital and SanDisk shares split the difference today on Wall Street. Western Digital stock bounded 4.5% on the stock market today , while SanDisk stock slumped 1.7%. The companies’ shares have plunged 34% and 10%, respectively, since the $19 billion deal was announced Oct. 21. At the time, the transaction was at a 70% premium to SanDisk’s stock price, Alken analyst Vincent Rech wrote in an open letter to Western Digital shareholders. “The price being paid for SanDisk is excessive in light of the changing landscape for SanDisk’s products and capital markets considerations,” he wrote, noting that Western Digital would be forced to take on $14 billion in debt to fulfill the deal. “SanDisk, specifically, has suffered significant business challenges recently, causing us to worry as well about paying top dollar for a melting franchise,” he added. Since the deal was announced, competition in the Nand (flash memory) field has expanded, squeezing demand, he wrote. Now, a key element of SanDisk’s sales is under attack. Hours before Western Digital and SanDisk announced their merger, Intel ( INTC ) unveiled its $5.5 billion plan to convert its Dalian, China, facility to ramp non-volatile memory. Intel and Micron Technologies ( MU ) jointly developed 3D Nand and 3D XPoint in 2015. And Tsinghua Unigroup’s entrance into the chip industry will only stoke more competitive fires, Rech wrote. The Chinese conglomerate plans to invest $47 billion to become the world’s No. 3 chipmaker. To that end, Tsinghua invested $3.8 billion in Western Digital in the month following the SanDisk acquisition plan. Further, SanDisk is dependent on Toshiba for Nand manufacturing. Earlier this month, Toshiba reported its biggest annual loss. And earnings forecasts for SanDisk — as well as its Nand-rivals Micron, Toshiba, Samsung and SK Hynix — have dropped 30% since the deal was announced. “The market now expects the Nand market to be more competitive — and profit more elusive — than the time the transaction was originally negotiated,” he wrote. In 2015, SanDisk reported $616 million in operating income — the lowest level since 2009 — and well below the $1.5 billion in four of five years that ended Dec. 31, 2014, Rech wrote. Last year, SanDisk suffered from major revenue losses from top customer Apple. Acquiring SanDisk gives Western Digital quick access to the Nand chips needed for its solid-state-drive business, Rech wrote. But that only comprised 7% of Western Digital’s total sales in 2015. Alken plans to vote on March 15 against the merger. Should the deal fail, Western Digital would be required to pay SanDisk $185 million.