The last week or so has not been kind to Fitbit Inc (NYSE:FIT). The stock crashed and lost 30 percent of its value after the company admitted that its sales in the upcoming holiday season will only grow by at most five percent compared to a growth of 92 percent in 2015 4Q. Naysayers are now convinced that the market for high-tech wearables which Fitbit makes is growing saturated especially in the face of slowing demand in Asia.
Rumors of the demise of high-tech wearables are greatly exaggerated, but Fitbit has serious problems despite being the biggest producer in this market. It is facing serious competition from other firms making their own wearables and is struggling to distinguish itself despite massive R&D spending. Fitbit’s stock is currently less than $9 and more cautious investors should be welcome to cut their losses while they can. But Fitbit has some potential to turn around, and thus I would recommend that investors should just hold and wait for now.
Saturated or Not?
As noted above, Fitbit manufactures high tech wearables with a particular emphasis on fitness. Fitbit’s devices are essentially smartwatches that are capable of tracking your speed, calories burned, and heart rate so that individuals can gain a better sense of the progress they make exercising.
Fitbit claims that as individuals worldwide get more concerned about battling obesity and keeping track of their health, demand for their watches will increase. According to Fortune, CEO James Park stated that while 20 percent of U.S. adults own a fitness tracker, two-thirds want to own one.
This unfulfilled market would be a good target for Fitbit, never mind the global demand for fitness trackers. These optimistic predictions fall in line with a September market research report that predicted basic wearables market to grow 26 percent year after year according to Pantagraph.
But even if the market for wearables continues to grow, Fitbit has a serious problem in the form of competition. Chinese companies like Xiaomi are creating their own wearables that are competing with Fitbit on price, while tech giants like Apple (NASDAQ:AAPL) and Samsung (KS:005930) are creating true smartwatches which would offer than a mere fitness tracker. Fitbit is finding itself attacked both on the high end and low end. The attacks on price in particular are a huge issue because Fitbit has had to deal with the fact that its sales in Asia fell by 45 percent as customers are choosing to buy cheaper, knockoff Chinese goods.
Production and Innovation
If Fitbit is going to compete with major tech giants, it needs to keep innovating. The Pantagraph analysis of Fitbit’s situation notes that the company has increased research and development spending by 150 percent in 2016 compared to the previous year. This would guarantee a high yield for investors. Fitbit released its Charge 2 and Flex 2 fitness trackers which has come out to positive reviews.
But if Fitbit has released new fitness trackers in September, why does it expect its holiday sales to be so low? There are a few problems. It should be first noted that since the Charge 2 and Flex 2 were released in September and the 2016 3Q, the sales in that period ended up boosting the 3Q results at the expense of the 4Q if Fitbit had chosen to wait.
However, there are two bigger problems. Fitbit admitted that it is having production issues with the Flex 2. CEO Park stated that while the Flex 2 is small and looks like a wristband, it is “incredibly difficult to swim-proof it and to find batteries for it.” Fitbit has moved to producing it with robots, but the production process is “non-optimal.”
The production issues should eventually be resolved, though it will impact Fitbit’s ability to supply watches to holiday customers and thus impact its sales. But the other problem is that while the Flex 2 is an improvement over previous trackers, it is not enough. It is still behind what regular smartwatches can do, and does not fix the problem of how Fitbit is stuck in the middle of terms of price and quality.
A possible comeback, but not likely
The one challenge which every tech company has to face is how it can constantly innovate and stay ahead of the competition. While Fitbit is trying to create new and better watches, the fact that it is in a fairly niche market means that customers are perfectly willing to hold on to the fitness trackers they have instead of buying a new one.
The good news is that the fitness tracker market can be niche, forecasters anticipate that it will continue to grow and Fitbit commands a sizable market share. But the company needs to turn around and it is difficult to imagine how it will do so in the near future.
Given Fitbit’s recent share fall and low price, investors should hold on to it for now. But the company is going to have to make some shake ups in order to turn things around.