Image source: Fitbit.   

There’s some fresh analyst love for Fitbit (NYSE:FIT) Thursday morning. Wedbush initiated coverage of the leading maker of fitness trackers with a bullish outperform rating. Analyst Nick McKay is setting a price target of $18 on the shares. That may be below last year’s IPO price of $20, but it represents an upside of 28% from Wednesday’s close. 

Wedbush’s McKay feels that commoditization concerns may be overblown. The worries are real, of course: We’re seeing sales growth decelerate and, more importantly, seeing net margins contract as Fitbit competes with the growing number of entrants into the wearable fitness tracking market.

However, McKay sees potential in co-branding opportunities, accessories, and corporate wellness deals. Those catalysts, in his view, outweigh the commoditization risks.   

The Fitbit brand matters, something that we found out late last year when Target (NYSE:TGT) announced that it would be subsidizing the purchase of entry-level fitness trackers for its workforce. That’s a pretty big deal considering that Target has 335,000 employees, even if most will pass on the offer. That more of them aren’t taking advantage is a shame for Target, since the cheap chic retailer’s health insurance costs would naturally decline if it encouraged its employees to lead more active lifestyles — something that fitness bracelets tend to do.

Corporate services accounted for less than 10% of Fitbit’s revenue when the Target deal was announced, but that segment has also been one of the fastest growing for the company. More companies will follow Target’s lead in promoting fitness trackers for their employees, and Fitbit will be the brand to benefit most, since it’s the name the market knows and accepts. 

Tracking the code

Wedbush’s $18 share price target is also conservative. It sees Fitbit earning $1.50 a share next year on $3.15 billion in revenue. That means that even if Fitbit hits Wedbush’s goal of appreciating by 28% to hit $18 a year from now, it will still be trading at just 12 times that year’s earnings and just 1.2 times revenue. 

Fitbit is growing a lot faster than that. Revenue grew 50% through the first three months of this year, and Fitbit’s own guidance suggests 35% to 40% of top-line growth for 2016. The bottom line isn’t expected to grow as quickly on a per-share basis, but that’s largely due to new shares that were added following last year’s IPO. 

There is pressure to innovate. The Blaze smartwatch and Alta fitness bracelet that it introduced earlier this year accounted for a good chunk of the first-quarter’s sales. However, the Fitbit brand is also a big reason why each of those new devices sold more than a million units apiece. With Fitbit stock in the low teens, it’s hard to fault Wedbush’s logic in hopping on for the ride. 

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Fitbit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.