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Fitbit Inc (FIT) has agreed to be acquired by Alphabet Inc (GOOGL) in a $2.1 billion deal. The most worrying aspects of Fitbit’s weak fourth-quarter results its plummeting profitability, according to Longbow Research.

The Fitbit Analyst

Nikolay Todorov maintained a Neutral rating for Fitbit.

The Fitbit Thesis

Fitbit has been struggling to achieve sustainable profitable growth and 2019 is the third consecutive year of declining sales and profitability, Todorov said in the note. He added that the company’s strategy to spur an acceleration in users by offering value-oriented trackers and smartwatches could not stop the slowdown in user growth.

Fitbit reported a fourth-quarter loss of 12 cents per share, missing the consensus estimate of 3 cents per share in earnings by a wide margin, the analyst mentioned. Gross margins contracted to 26.3%, down more than 12.5 points year-on-year, on account of a mix shift to smartwatches, higher promotional discounting and tariff headwinds.

Fitbit’s quarterly sales of $502 million was the lowest level reported since 2014, down 12% year-on-year and short of the Street's expectation of $520 million. Todorov further that sales remained weak, despite “what appears like deep promotional activity in the quarter.”

The analyst wrote in the note, “With no clear vision ahead and with an outlook for continued net losses, we seriously wonder if a strategic buyer like Google will be able to achieve a satisfactory ROI from the potential acquisition.”

FIT Price Action

Shares of Fitbit were down 1.01% to $6.40 at time of publication.