Investors have been telling companies that they are tired of the market supporting initial public offerings (IPOs) in which insiders or venture backers cash out. The same is being applied now to companies that came public and when secondary share offerings come in short order. That is part of what has hammered the shares of Fitbit Inc. (NYSE: FIT) of late. Its shares were at $40.00 just two weeks ago, and now they have fallen under $30.00.

Apparently, that weakness is enough for Bank of America Merrill Lynch to make a critical alert for the firm’s clients. Nat Schindler, Justin Post and Jason Mitchell were behind the call at Merrill Lynch that raised Fitbit’s rating to Buy from Neutral, based on improving 2016 confidence. The price objective is $36.00, against a $28.76 prior closing price.

Merrill Lynch’s team sees Fitbit as a winner in the rapidly growing health and fitness wearable market. It sees Fitbit as both highly profitable and experiencing hyper-growth, after 180% growth in 2014. The firm sees tailwinds from an expanding market space, larger international opportunities and Fitbit’s potential as a platform play in the long term.

Tuesday’s Fitbit upgrade comes on the heels of last week’s secondary offering. One serious caveat here is that Merrill Lynch was one of the top underwriters (see below) in that secondary offering. That offering was downsized to 17 million shares at $29.00 per share, with the company selling 3 million shares and 14 million shares being sold by shareholders.

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Tuesday’s upgrade was based on several key issues:

• Conservative fourth-quarter estimates given implied growth deceleration despite a partial and late fourth-quarter product launch
• Improved confidence in 2016, as international sales ramp and corporate wellness programs build into the platform play
• Underwhelming competitive products for the holiday season

While competitive risk remains, Merrill Lynch sees that maybe in 2017, based on the current corporate buying and on limited competitive offerings out in the near term. The firm gave the following changes to its expectations:

• It is raising fiscal 2016 revenue and earnings estimates to $2.4 billion and $1.19 per share from $2.3 billion and $1.05 per share after a solid beat to the third quarter.
• A lower $36 price objective is based on peer multiple compression (after GoPro dropping 65% since August), and that is based on 30 times its 2016 adjusted EPS estimate.

Another boost is that the firm sees Fitbit’s fourth-quarter guidance of $638 million as conservative. Fitbit’s international advertising also has been expanded into more countries (28 as of the third quarter). More than 20 companies have signed on for the corporate wellness, including Target, Barclays and Aon. Merrill Lynch believes that this will help to drive 2016 revenue above expectations with higher device sales. Merrill Lynch’s report also addressed the competition as limited:

Several companies have released new or updated fitness trackers ahead of the holiday season including Microsoft Band 2, UP4 and Sony Smartband 2. Many of these products have minor improvements to last year’s models with no “must have” features to draw consumers away from Fitbit, likely removing risk into 2016. The first quarter of 2016 could be a difficult comparable quarter as it is the first full product comparable but we expect Fitbit to launch new products in 2016 with new features/technology (R&D staff has tripled since the third quarter of 2014) reaccelerating growth.

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In case you see more quick and timely analyst upgrades, just keep in mind which firms were and were not in that recent secondary offering’s underwriting syndicate. Morgan Stanley, Deutsche Bank, Merrill Lynch, Barclays and Citigroup were the joint book-running managers, and SunTrust Robinson Humphrey, Piper Jaffray, RBC Capital Markets and Stifel were listed as the passive joint book-running managers.

Fitbit shares were last seen up almost 4% at $29.90 Tuesday, after almost 1 million shares traded in the first 10 minutes of trading. Its post-IPO range (less than 52-weeks by far) is $26.80 to $51.90.

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