Why Fitbit’s share price is struggling to wear out its competition

Wearable device maker Fitbit [FIT] pricked investors’ interest when a report surfaced that it was considering exploring a sale after it held discussions with investment bank Qatalyst Partners, sources told Reuters.

Fitbit has struggled to gain a major foothold in the global smartwatch market, as rivals Apple [AAPL] and Samsung [SMSN] continue to dominate the space for premium smartwatches, while China’s Huawei and Xiaomi [1810.HK] continue to chip away at its hold of the fitness tracking sector.

Fitbit’s share price spiked close to 12% on 20 September on speculation that it was potentially considering a deal, adding more than $100m to its market cap to a total valuation of $1.1bn, which Yahoo Finance’s Brian Sozzi believes is completely misplaced.

He highlights that if you dig into the company’s financials their newer watches aren’t selling, they have not diversified outside of wearables and average selling prices are coming down. “I can get a better Apple Watch 2 than whatever Fitbit is putting out in the market,” Sozzi states.

Fitbit’s shrinking market share

Since its founding in 2007, Fitbit has been known for helping pioneer the wearable device craze with its wristband activity trackers. However, ever since its 2016 pivot to become more of a digital health company, it has been exploring smartwatches.

When the company released the Fitbit Ionic in September 2017 to compete with the Apple Watch Series 3, it did well despite the fierce competition, selling 2.2 million wearable devices in Q1 2018 – and a total 13.9 million in the year as a whole. However, as sales increased throughout 2018, market share declined, as Fitbit went from holding 14.8% in Q118 to just 5.9% in Q1 2019, according to figures from Statista.

The company’s revenue from smartwatches has also been affected, falling 27% in the second quarter – partly due to weaker than expected sales of the Fitbit Versa Lite. Its smartwatches accounted for just 38% of its total revenue of $314m for the quarter, and there has been a decrease in the number of devices sold by 7% year-over-year.

27%

Decline in second quarter smartwatch revenue

Meanwhile, as a result of a 19% year-over-year decline in the average selling price of its products, Fitbit lowered its guidance for Q3 and expects a revenue decline of between 15% and 10%, putting it in the $335m-$355m range.

Despite the lowered guidance, cofounder and CEO James Park remains confident in its long-term transformation strategy, particularly its Fitbit Health Solutions channel which is up 42% in the first half of 2019.

“In addition, we have made progress in diversifying our revenue towards building more predictable, recurring revenue streams with the launch of our premium services in two test markets. We are pleased with the initial results and expect a full launch this fall,” Park said.

Market cap	$953.29m
Forward P/E	-14.19
EPS (TTM)	-0.54
Return on Equity (TTM)	-20.65%

Fitbit share price vitals, Yahoo finance, 9 October 2019

Apple dominates smartwatch market

While there’s been no official announcement about who the potential buyer could be, there are rumours circulating that Alphabet [GOOGL] could be a contender with its new operating system Kai, as well as the new Soli chip that can track motion on a microscopic scale.

But with such a long line of failed wearable products from companies such as Nike [NKE], Microsoft [MSFT] and Intel [INTC], is it a flailing market?

Not for Apple. The company has seen massive growth in its wearables business, which grew more than 50% in Q3 2019 and is now the size of a Fortune 200 company. But Apple acquiring Fitbit is not something Robert Lehar thinks is likely.

“Acquiring Fitbit for its trackers would be akin to buying Apple’s iPod business - a legacy business with no future,” Lehar writes on Seeking Alpha. “The smartwatch segment of the wearables market is then basically the Apple Watch market with others fighting over the less profitable or downright unprofitable lower-end of the market.”

“Acquiring Fitbit for its trackers would be akin to buying Apple’s iPod business - a legacy business with no future” - Robert Lehar on Seeking Alpha

Ultimately, Fitbit is a small company with a market cap of just $973m (as of 7 October) that has struggled to innovate its product cycles. Since floating on the New York Stock Exchange in June 2015, its stock has fallen more than 87% from its $20 offering price and currently trades around the $3.73 mark.

The stock has a consensus hold rating among 10 analysts on Reuters, with 22.97 million shares being shorted as of 13 September.

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