Fitbit Inc (N:FIT) had a towering quarter in 3Q2015 when the company reported revenue rose sharply by $159.9 million from a year ago to $409.3 million. The company sold 4.8 million units of its various wearables and promised to generate even more revenue in 4Q2015. Management guided for 4Q revenue of at least $620 million.
However, Fitbit’s stock recently dramatically changed direction after the company announced its $200 fitness wearable called Fitbit Blaze. The development raises the question about whether Fitbit missed expectations or the company is simply misunderstood.
Fitbit Blaze is somewhere between a smartwatch and fitness tracker. It has also been described as an upgrade of Fitbit Charge HR wearable at a modest price. It is the perception that Blaze is somewhat a smartwatch that seems complicates matters for Fitbit with the stock recently sinking to below IPO price.
What happened? Did Fitbit Inc (NYSE:FIT) fall short of its promise or is the market misinterpreting Blaze?
Fear of taking on Apple
If Blaze is presented as a smartwatch, it means the gadget will be competing for market share with Apple Inc’s (NASDAQ:O:AAPL) Apple Watch and a host of other smartwatches. As a smartwatch, there is a slim chance Blaze can win the contest given that it doesn’t boast the kind of app ecosystem that devices like Apple Watch have. Additionally, the risk of competing with Apple in the smartwatch space sends a chill down the spines of many Fitbit investors given that taking on a deep-pocketed rival like Apple can be a brutal experience.
However, thinking of Blaze as a more of a smartwatch and less of an activity tracker appears to contradict Fitbit’s mission. During the last earnings call, Fitbit’s CEO, James Park, sought to put a difference between Fitbit’s mission and that of Apple in the wearable space, especially insisting that the two companies serve different market segments. As such, Blaze must be a fitness tracker first and something else later, in which case it expands Fitbit’s fitness gadgets offering. That position should also eliminate the fear of choking competition against Apple.
Fitbit’s potential growth drivers
Favorable fitness trends in consumer market
A growing number of people are now investing in devices that help them stay healthy and fit. Many of these people are paying for their health and fitness gadgets out-of-pocket. With its strong brand and an expanding portfolio of fitness devices available at different price points, Fitbit Inc (NYSE:FIT) stands to benefit from the shift in the consumer fitness behaviors. Its social platform also brings and aspect of customer retention as sharing of experiences can encourage device upgrade and lock in customers at the same time.
Corporate acceptance
Fitbit already sells its activity trackers to a large and growing number of large corporations including Barclays (L:BARC). Sales to corporate wellness customers are made directly by Fitbit, thereby allowing the company to squeeze maximum profits from the deals.
Not only does Fitbit already enjoy a strong connection with corporate fitness wearable buyers, but an increasing number of companies are choosing Fitbit products over the competition. Fitbit can monetize the trust that it has already earned among corporate wellness customers in a number of ways. It can ascend those customers to more expensive products with better margin, thereby opening the doors to improve profitability. Additionally, the company can reference its growing list of high-profile corporate customers to win more corporate wellness businesses. Moreover, Fitbit can rapidly grow its social fitness platform by enrolling corporate users of its activity gadgets.
Companies are turning to wearable health and fitness trackers to help their employees live more active lives. They also use activity monitors to help them assess the performance of their other wellness programs. With a healthy employee population, companies are finding that they can lower their costs related to employee healthcare. As such, an increasing number of companies are buying activity monitoring gadgets for their employees, thus expanding Fitbit’s addressable market. Corporate wellness budgets for wearables have seemed to improve in the recent times.
Presently, about 10% of Fitbit’s total revenue comes through corporate wellness channels.
Wellness social network
Besides the sale of fitness gadgets, Fitbit Inc (NYSE:FIT) has also built a social network for users of its various monitoring device. Enrollment and engagement on the social network is still compared to more active social sites such as Twitter (N:TWTR) and Facebook (O:FB). However, the social network demonstrates how Fitbit has plans to diversify its revenue stream away from devices. Presently, the company generates almost all of its revenue from the sale of fitness gadgets that include wristbands and scale.
There are multiple ways in which Fitbit can monetize its social platform. For example, the platform provides the company with the opportunity to squeeze more value from its install base. That can be done by selling additional devices to existing customers, enticing them to upgrade their devices faster or selling them other related services. There is a huge growth opportunity in Fitbit’s social fitness platform, which will become even greater as the platform grows in subscriber number and engagement.
Pressure points
Heavy reliance on hit products
The success of Fitbit Inc (NYSE:FIT) has always come from the support of incredible popular products. However, not every product that comes to market turn out to be a hit. As such, if for any reason Fitbit fails to sustain its blockbuster launches, the company will find it difficult to grow its revenues and improve profitability. Additionally, competitors could easily catch up with it, thus diluting its other competitive advantages.
Litigation risks
Fitbit is facing a number of lawsuits involving its Fitbit Flex, Fitbit Force and other gadgets. Litigatios always come with uncertainties that can scare away investors or delay certain executions. In some cases, litigation settlements can take a huge toll on the balance sheet, thus introducing more risks in their wake.
Singles-sourcing risks
Fitbit Inc (NYSE:FIT) doesn’t have a diversified production chain. The company produces its products from only one contract manufacturer. Moreover, Fitbit obtains components for its products from only a short list of suppliers, sometimes a single supplier. While the strategy of working with a few production partners helps the company to keep its business secrets and may be the reason behind its success, there are risks to the practice. If the single manufacturer or component supplier faces factory issues, Fitbit can be forced to delay the launch of a new product, thus allowing competitors a field day.
Competition
In the fitness tracker business, Fitbit Inc (NYSE:FIT) has quite a number of competitors, some established while others are new entrants. Established fitness device vendors include Misfit, Garmin and Jawbone. More traditional health and fitness providers, such as Nike Inc (NYSE:N:NKE) and Under Armour Inc (N:UA), are also expanding into wearable tech with fitness trackers. There are also a growing number of providers of independent health and fitness apps, which are also vying for the health monitoring tech dollars.
Conclusion
Fitbit Inc (NYSE:FIT) has attractive growth and profitability potential and many of its challenges can be easily avoided.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.