Fitbit IPO Update: Long-Term Investors Should Avoid Fitbit As Its Glory Days Are Behind It

  • The fitness tracker company Fitbit went public and surged more than 100% above the initial IPO price.
  • Fitbit surged in a booming fitness trend and presented substantial top-line growth rates and positive net profit.
  • Smartwatches will likely kill the fitness tracker market as it happened to MP3 players and E-readers when smartphones and tablets gained popularity.
  • For now, Fitbit is a stock to avoid until a clear business plan is presented to explain how the company plans to compete in the post-smartwatch era.
Fitbit post IPO analysis

A leader in fitness trackers, Fitbit (NYSE:FIT), went public last week in a very successful debut and soared more than 50% on the first day of trading. The San Francisco-based startup raised its IPO price range twice from the initial mid-point of $15 to the higher mid-point of $18 and finally to its official IPO price of $20. Even though Fitbit raised its IPO price by 35% just days before its market debut, many investors still saw this as an attractive investment, and demand pushed the opening price up to $29, which was 93% above the initial Fitbit IPO mid-point price and 19x returns for Series D investors. As if the amazing skyrocketing, first-day surge in Fitbit’s price on was not enough, the share rose another 9.5% on the second day and closed at $32.5, which reflects a market cap of $6.6B for the company.

Fitbit’s impressive market cap is higher than the market caps of major companies like AOL (NYSE:AOL) with $3.9B, 3D Systems (NYSE:DDD) with $2.3B, Dun & Bradstreet (NYSE:DNB) with $4.6B, Rackspace Hosting (NYSE:RAX) with $5.5B, and SolarCity (NASDAQ:SCTY) with $5.6B, to name just a few examples. Although Fitbit enjoys significant interest and demand, is it an attractive long-term investment? I am not so sure.

Fitbit’s Impressive Growth

Fitbit is focused solely on the fitness tracker market and offers seven different smart wristbands that range from $59.95, for the entry-level Fitbit Zip, to $249.95, for Surge, a high-end performance device. As shown in chart 1 below, Fitbit generates an increasing amount of revenues from selling its devices and presents incredible growth rates of 247% year-over-year and 32% quarter-over-quarter.

Fitbit_chart 1_062115

Fitbit financials are impressive not only because the company increases revenues rapidly but also because it has a significant gross margin of 50% (as of Q1’15) and a positive bottom line that rises at an average of 20% each quarter, up to $48M in Q1’15. These figures are very unusual in the startup arena and were probably responsible for some of the demand for Fitbit’s shares. Objectively, these are impressive figures that satisfy investors when they look for an ultra-growth company to invest in. Fitbit enjoyed a worldwide boom in health and fitness awareness and succeeded in becoming a synonym for a fitness tracking device and probably one of the wearable market pioneers. As shown in chart 2 below, Fitbit controlled almost 50% of the wearables market in Q1’15, leaving rivals like Garmin (NASDAQ:GRMN) and Jawbone well behind with only Xiaomi, the Chinese tech giant, getting close to challenging Fitbit’s dominance. Also, during 2014 consumer electronics vendors started offering their smartwatches, which decreased the market share of fitness tracker vendors: Fitbit, from 45% in Q1’14 to 34% in Q1’15, Garmin from 8% to 6% and Jawbone from 5% to 4%.

Fitbit_chart 2_062115

Future of Fitness Trackers Market

Even though Fitbit presents sound financials and significant market share, I believe that the end of the fitness trackers market as we know it is closer than many investors assume. In the pre-smartwatch era, Fitbit had an innovative and fresh image that appealed to many fitness enthusiast and gadget buffs. However, as more tech companies like Apple (NASDAQ:AAPL), Samsung, Sony, LG, Motorola, Xiaomi, and many others launch their smartwatches operated by Android Wear/ iOS – smart wrist devices like fitness trackers and GPS trackers become useless. When consumers can purchase a Sony Smartwatch 3 for $175, or a Samsung Gear 2 for $170, and receive a fully functional operating system with many features and apps that include health, fitness, and GPS – they have no reason to spend a similar amount for a fitness tracker that provides a narrow offering and limited capabilities.

I believe that the fitness trackers market will merge into the smartwatch market, populating lower segments, and offering attractive price points for entry level devices in the same way MP3 players and E-readers merged into the smartphones and tablets markets, respectively. This expected trend will probably have a minor impact on volume in the short term. However, its average selling price will experience increased pressure that will result is declining growth rates. Investors who bought into the Fitbit IPO expecting to see similar growth rates or even resemble growth rates in the next few years will probably be disappointed. Fitbit gained the most from the fitness trackers market boom, which is expected to fade and shift to smartwatches. Consumers who are price sensitive, Fitbit enthusiasts, and users looking for a basic offering could settle for a Fitbit in the future, all the rest will probably upgrade to a smartwatch.

Conclusion

Fitbit, the fitness tracker market leader, went public last week and closed the second day of trading at $32.5, 116% above its initial IPO price. Fitbit presents substantial top-line growth rates. However, the company that rose mainly in the pre-smartwatch era will have a very difficult task to maintain these rates when smartwatches provide more features and capabilities for lower or similar prices. The merging process of the fitness trackers market into the smartwatch market has already started and, in the long run, I don’t see how Fitbit could overcome consumer electronics veterans like Apple, Samsung, LG, Motorola, and even Xiaomi in the smartwatch market. For now, I believe investors should avoid Fitbit until its plans for the smartwatch market becomes clear.

Disclosure: Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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Comments on this article and FIT stock

user profile picture
Yussef Kamal
bullish
Why would you tell anyone to avoid a stock with such a surge? Are you upset you made a wrong call and went short? LOL
1 reply
user profile picture
lior-ronen
bearish
First of all, I don't have a position in FIT. Second, if you read the article above you can answer your questions by yourself.
Good luck,
Lior
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Do share this awesome post