Fitbit Stock Crashes After Apple Clash

  • Fitbit stock has been selling off heavily after the company launched its first smartwatch, Blaze.
  • Blaze is designed to compete with Apple Watch albeit with a thinner feature set.
  • How can Apple capitalize on Fitbit's latest move?

Leading fitness tracker maker Fitbit Inc (NYSE:FIT) has kicked off the year on a very sour note. Fitbit stock has hit a post-IPO low after tanking 23% over the last two trading sessions after the company unveiled the Blaze smartwatch, the company’s first true smartwatch. Blaze is a $200 smartwatch that is designed to compete with the Apple (NASDAQ:AAPL) Apple Watch.

Fitbit Stock 5-Day Returns


Source: CNN Money

The heavy Fitbit stock selloff has come just days after several Wall Street upgrades came its way on the back of a stellar holiday season. Analysts have reported that Google global searches for Fitbit were 60% Y/Y with Fitbit managing to reclaim the most-downloaded status in China from Xiaomi. Several analysts reported that Fitbit has lately been stealing market share from its competitors, which might include Apple.

So what’s wrong with Fitbit’s latest product? According to early reviews, Blaze is actually a pretty impressive smartwatch. Blaze contains a feature set that is very similar to Fitbit’s Surge smartwatch which retails for $250. The smartwatch boasts a battery life of 5 days (Apple Watch can manage 18 hours under normal use), a color touchscreen, on-screen workouts that the company refers to as the FitStar Personal Trainer, continuous heart rate tracking, Blue-tooth-based call, automatic sleep tracking, smartphone-based GPS tracking, automatic exercise recognition, text and calendar notifications among a host of other exciting features. Unlike Fitbit’s no-frills fitness trackers, Blaze has been hailed as a stylish product.

So why has the market caught a fit after Fitbit’s latest product launch? There are a couple of reasons to explain this. First off, Fitbit has failed to release any updates for its lower-end fitness trackers: Charge and Charge HR bands. This in effect could mean that the company is trying to go upscale right into Apple’s territory of high-end fitness trackers. To make matters even harder for Fitbit, the company plans to launch Blaze in March, which happens to be the same time that Apple will launch its second-generation smartwatch.

It’s not hard to understand why Fitbit is trying to move up the ladder. Fitbit has managed to achieve a rarity for a young public company--becoming profitable. Most of the newly IPOed companies in 2015 are not profitable. Fitbit’s profit margin, however, has been on a decline.

During Q3 2015, Fitbit reported a gross margin of 48.3% which is impressive for a hardware company. That gross margin, however, was 560 basis points lower than the previous year’s reading. Fitbit’s operating margin fell 474 basis points to 16.45% over the same period. Fitbit stock fell more than 15% after the company’s second quarter earnings call after it reported lower gross margins. The market generally views shrinking gross margins as a sign of a weakening brand and loss of pricing power.

Despite being $150 cheaper than an entry-level Apple Watch, The Blaze now qualifies as one Fitbit’s upper-end products. Investors now fear that Blaze is not adequately equipped to compete effectively with Apple Watch. Blaze has limited features compared to Apple Watch and the Samsung Gear S2. The products is not waterproof and lacks independent GPS tracking. Fitbit appears to be more interested in competing with Apple than focusing on its own strengths.

All this might play right into Apple’s hands. A lot of analysts have been blaming rather lackluster Apple Watch sales on Fitbit’s dominance in the fitness tracker market. Fitbit is probably trying to become an upscale fitness tracker manufacturer which will mean offering products at price points closer to Apple’s and in the process exposing itself to more competition from Apple. Apple of course has much more extensive marketing muscle than Fitbit, and Fitbit stock might suffer if it continues encroaching into Apple’s territory.

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