Finance

Should You Buy Fitbit, Inc. (FIT) or ReShape Lifesciences Inc. (RSLS)?

Fitbit, Inc. (NYSE:FIT) shares are up more than 4.03% this year and recently increased 0.34% or $0.02 to settle at $5.94. ReShape Lifesciences Inc. (NASDAQ:RSLS), on the other hand, is down -99.71% year to date as of 09/11/2018. It currently trades at $0.06 and has returned -4.76% during the past week.

Fitbit, Inc. (NYSE:FIT) and ReShape Lifesciences Inc. (NASDAQ:RSLS) are the two most active stocks in the Scientific & Technical Instruments industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect FIT to grow earnings at a 13.00% annual rate over the next 5 years. Comparatively, RSLS is expected to grow at a 0.24% annual rate. All else equal, FIT’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. FIT’s ROI is -28.90% while RSLS has a ROI of -41.10%. The interpretation is that FIT’s business generates a higher return on investment than RSLS’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, FIT’s free cash flow was -4.5% while RSLS converted 0% of its revenues into cash flow. This means that, for a given level of sales, RSLS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. FIT has a current ratio of 1.90 compared to 0.60 for RSLS. This means that FIT can more easily cover its most immediate liabilities over the next twelve months. FIT’s debt-to-equity ratio is 0.00 versus a D/E of 0.00 for RSLS. FIT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FIT trades at a P/B of 2.12, and a P/S of 0.96, compared to a P/B of 0.00, and a P/S of 1.33 for RSLS. FIT is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. FIT is currently priced at a -6.46% to its one-year price target of 6.35. Comparatively, RSLS is -99.81% relative to its price target of 32.00. This suggests that RSLS is the better investment over the next year.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FIT has a short ratio of 6.00 compared to a short interest of 0.05 for RSLS. This implies that the market is currently less bearish on the outlook for RSLS.

Summary




ReShape Lifesciences Inc. (NASDAQ:RSLS) beats Fitbit, Inc. (NYSE:FIT) on a total of 6 of the 14 factors compared between the two stocks. RSLS is growing fastly, has a higher cash conversion rate and has lower financial risk. RSLS is more undervalued relative to its price target. Finally, RSLS has better sentiment signals based on short interest.

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