Anyone researching Fitbit Inc (NYSE:FIT) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks are more sensitive to general market forces than others. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said ‘volatility is far from synonymous with risk’ in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.
What FIT’s beta value tells investors
Given that it has a beta of 1.67, we can surmise that the Fitbit share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Fitbit shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Fitbit’s revenue and earnings in the image below.
How does FIT’s size impact its beta?
With a market capitalisation of US$1.4b, Fitbit is a small cap stock. However, it is big enough to catch the attention of professional investors. It is quite common to see a small-cap stock with a beta greater than one. In part, that’s because relatively few investors can influence the price of a smaller company, compared to a large company.
What this means for you:
Beta only tells us that the Fitbit share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there’s plenty more to learn. In order to fully understand whether FIT is a good investment for you, we also need to consider important company-specific fundamentals such as Fitbit’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for FIT’s future growth? Take a look at our free research report of analyst consensus for FIT’s outlook.
- Past Track Record: Has FIT been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FIT’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how FIT measures up against other companies on valuation. You could start with this free list of prospective options.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.