Fitbit Earnings: Apple Watch Fears Overdone

  • Fitbit shares have been selling off heavily even after the company delivered a strong Q2 2015 quarter
  • The selloff appears to be due to profit taking after the shares made large gains post IPO, and also due to fears related to the competitive threat posed by Apple Watch
  • A quick check, however, reveals that Apple Watch sales have slowed down dramatically over the past few weeks
  • The market for wearable devices is maturing very quickly and Apple Watch is not likely to slow down Fitbit
Fitbit selloff overdone on iWatch threat

Fitbit (NYSE:FIT) shares are down sharply even after the company delivered strong fiscal 2015 results that not only beat estimates, but were also exceptional by any yardstick. Fitbit reported Q2 revenue of $400.4M (+252.5% Y/Y) beat estimates by $80.95M while EPS of $0.21 beat by $0.13. Furthermore, the company went ahead and issued strong guidance for the current quarter and year, well above consensus estimates: Q3 revenue of $335M-$365M and EPS of $0.07-$0.10 vs. a consensus of $261.9M and $0.07, and 2015 revenue of $1.6B-$1.7B and EPS of $0.69-$0.77 vs. a consensus of $1.41B and $0.61.

In an ironic twist of fate, shares have tanked 18% after the glowing Fitbit earnings report, which is confounding to investors. So what’s going on here?

Fitbit 5-Day Share return


Source: CNN Money

Doubts about sustainability of momentum abound

There are a few plausible reasons why Fitbit stock has been badly hammered. The first is a huge wave of profit taking by Fitbit investors who probably believe the shares have run ahead of themselves. Prior to the huge selloff, Fitbit shares were up more than 150% since the Fitbit IPO in June, and many investors felt that perhaps time was ripe to take some profits. The Fitbit shares are still up 45% since its IPO.

The second reason is that Fitbit investors fear that the company might not be able to maintain the strong momentum, especially now that Apple (NASDAQ:AAPL) has launched its smart watch. Though Apple remained tight-lipped about Apple Watch sales volumes, some analysts have made estimates. Strategy Analytics pegged Apple Watch sales at 4 million units for the quarter, giving the company a commanding 75% share of the smart watch market. In comparison, Fitbit sold 4.5 million fitness bands and activity trainers during the quarter, 15.3% better than first quarter sales and 165% Y/Y growth.

It’s quite clear that strong Apple Watch sales during the second quarter did not slow down Fitbit’s momentum in any way. The market for wearables, though still nascent, seems to be exploding and there is enough to go around for everybody. IDC estimates that the smart wearable market will grow at a blistering 683% during the current year, and 84.1% CAGR through 2019, underlining the strength market.

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

And, Apple and Fitbit serve rather discontinuous markets. People who buy an Apple Watch won’t necessarily forego Fitbit trainers ostensibly because an Apple Watch can double up as a fitness trainer as well. Moreover, the strong momentum shown by Apple Watch during the first weeks after its release might not last if current events are any indications. According to MarketWatch, Apple sold an average of 200,000 Apple Watches during the first few weeks after its release. By early July, the rate had dropped dramatically to just 20,000 units a day. The lower momentum is of course healthy for  fitness tracker manufacturers such as Fitbit. The Apple Watch fire has started to flame out, and this minimizes the competitive risk for Fitbit.

Apple Watch Sales

Source: Market Watch

Fitbit trainers have been likened to GoPro (NASDAQ:GPRO) extreme-action cameras. Fitbit is now enjoying powerful brand recognition, and that goes a long way in keeping its products flying off the shelves. The next part of the script for Fitbit is to figure out how to create a recurring revenue stream. GoPro recently launched a platform where people can upload the extreme action videos they shoot with GoPro cameras. Fitbit has made a little progress with FitStar, a company that it acquired earlier this year. FitStar offers exercise programs and yoga apps to personal trainers. At the moment, FitStar brings in less than 1% of Fitbit’s top line, but has the potential to grow.

Fitbit Takeaway

Fitbit shares still trade at a stratospheric 60 times 2015 expected Fitbit earnings, which limits their short-term upside potential. But the Fitbit personal trainer brand appears to be on the cusp of becoming a household name, which will give the company excellent growth runways. Long-term investors should wait for the shares to shave off maybe another 7%-10% before opening new positions in the shares.

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