Shares of Fitbit (FIT) are falling after a Morgan Stanley analyst downgraded the stock citing struggles to stabilize revenue and a resumption of cash burn.

ANALYST DOWNGRADE: On Monday, Morgan Stanley analyst Yuuji Anderson downgraded Fitbit to Underweight from Equal Weight and lowered his price target for the shares to $4 from $5. New smartwatches will be outweighed by declines in legacy products, while software opportunities in health coaching “will take time to ramp,” Anderson told investors in a research note. The analyst also said that updated search analysis suggests that older product categories are seeing accelerated declines in the first quarter and he believes fiscal year 2018 revenues will fall below management’s $1.5B target. Further, Anderson thinks declines will continue heading into 2019 and sees additional downside in shares with revenue not stabilizing and cash burn resuming. He added that new products like the Versa smartwatch could be sources of incremental risk as the recent pace of software and sensor developments has not “sufficiently catalyzed demand.” Anderson also noted that software revenues are unlikely to offset wearables declines for at least two years as the company will face challenges when driving adoption for its mobile-app based health coaching tool. Anderson’s bear case, which entails accelerating declining demand for Fitbit products, is $2 per share.

WHAT’S NOTABLE: On March 20, Roth Capital analyst Scott Searle noted that Fitbit expanded its smartwatch product portfolio with the Versa and kid-friendly Ace fitness tracker, expanding its existing smartwatch portfolio beyond the male fitness oriented Ionic and better positioning the company to participate in the rapidly growing smartwatch market. With numbers de-risked, digital consumer and therapeutics models emerging and nearly $3 in net cash per share, the analyst believes shares remain attractive. Searle reiterated a Buy rating and $8 price target on the stock.

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