Is Fitbit To Blame For Lackluster Apple Watch Sales?

  •  Fitbit has received a major upgrade from Barclays .
  • Fitbit issued very strong Q4 2015 guidance that points to a blistering 54% Q/Q growth.
  • Meanwhile, most estimates by analysts point to somewhat lackluster sales by Apple Watch.
  • Is Fitbit selling its fitness trackers at the expense of Apple Watch?

Leading fitness tracker manufacture Fitbit Inc (NYSE:FIT) has received a major upgrade from Barclays’ analyst Matt McClintock from equal weight to overweight. Mr. Matt said that the latest round of Fitbit selloff where the shares fell 26% after the company announced a huge secondary share offering of 17 million new shares during its third quarter fiscal 2015 earnings call was undeserved.

The huge selloff came even after Fitbit comfortably beat Q3 2015 consensus estimates: the company reported revenue of $409.3 million, good for a blistering 168% Y/Y growth and a good $58.3 million above estimates. Meanwhile, EPS of $0.24 handily beat the consensus by $0.14. Fitbit then went on to offer upbeat fourth quarter guidance of $620M-$650M and EPS of $0.20-$0.25, again easily topping consensus guidance of $580.7M and $0.20.

But perhaps the most important takeaway from the Barclays report was the other reason that Matt gave for the Fitbit upgrade: that Fitbit sales had in no way been negatively impacted by Apple (NASDAQ:AAPL) smartwatch, the Apple Watch, and had in fact seen its revenue growth accelerate during the two quarters that it had been competing head-on with Apple Watch.

Fitbit sold 4.8 million fitness trackers during the third quarter (Fitbit hardly ever calls the device a smartwatch), a new record for the company. If the company is to achieve its fourth quarter revenue target, it will have to sell a staggering 7.4 million trackers, and possibly more assuming the ASP falls a bit. So how does Apple Watch sales compare to Fitbit trackers? Apple has failed to reveal sales numbers for its smartwatch over the last two quarters. This kind of secrecy has led the investing world to speculate that Apple Watch sales are nowhere near impressive.

Apple lumps Apple Watch sales numbers into the ‘‘Other Products’’ category, a category that includes products like Apple TV, iPods and others. Apple reported revenue of $3.048 billion for the Other Products category during the fourth quarter, a 61% Y/Y and 21% Q/Q increase. Before Apple Watch was launched, the Other Products category had been in decline for several quarters by as much as 10% Y/Y over the past four quarters.

During the third quarter earnings call, the category reversed its fortunes and recorded positive growth, with Apple saying more than 100% of the growth was attributable to Apple Watch. This is effect meant that revenue from other products in this category had continued to fall.

Apple did not say the same thing during the fourth quarter call, so analysts have been left to conjecture matters here. Assuming the same case that played out during the third quarter repeated itself during the fourth quarter, and assigning an ASP of $500 for the Apple Watch (the cheapest model costs around $450), then Apple sold roughly 2.8 million Apple Watches.

That figure, however, is way lower than the average from a cross-section of analysts.


Source: AppAdvice

You will notice that there is a huge spread between the estimates by the analysts due to the wide range of possibilities. But assuming the 3.95 million devices average is in the ballpark, then it means that Apple Watch is not doing as badly as earlier thought considering that that was its second quarter in the market compared to Fitbit trackers which have been around for years. It also means that Apple Watch sold roughly 23% more devices during the fourth quarter than it during the third quarter. Meanwhile, Fitbit sold 4.5 million devices during its second quarter, which implies the last quarter represented a mere 7% sequential growth.

But what should give investors food for thought is Fitbit’s fourth quarter guidance of ~7.4 million trackers, because it will imply a 54% sequential growth for the company. Even assuming that the holiday season will give a huge boost to those sales, that’s a really huge sequential increase, and one that could possibly depress Apple Watch sales by quite a bit.

Apple investors, however, need not worry. The market for smart wearables is projected to grow at more than 84% CAGR through 2019. This provides ample growth runways for both Apple Watch and Fitbit trackers.

Worldwide Wearable Device Shipments

Product Category 2014 Shipments 2015 Shipments 2019 Shipments 2015 Year-Over-Year Growth 2014 - 2019 CAGR
Basic Wearables 22.1 39.0 66.3 76.0% 24.5%
Smart Wearables 4.2 33.1 89.4 683.0% 84.1%
All Wearables 26.4 72.1 155.7 173.3% 42.6%

Source: IDC Worldwide Quarterly Wearable Device Tracker, June 18, 2015

Ultimately Apple watch and Fitbit serve somewhat discontinuous markets since the average Fitbit tracker costs a third what the cheapest Apple Watch costs. Fitbit trackers are great for the diehard gym freak or fitness enthusiast. But most people fall somewhere below those extremes and this is where Apple Watch excels. So it would not be exactly correct to surmise that Fitbit is to blame for lackluster sales by Apple Watch.

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