Target Deal Sends Fitbit Stock Price Soaring

  • Fitbit shares have been making strong gains on the strength of the company's recent deal with Target Corp.
  • Employee wellness programs can provide good growth runways for Fitbit over the long-term.
  • Fitbit share performance over the short-term, however, remains in jeopardy due to the risk of market share loss as a result of growing competition from the likes of Apple Watch.

Shares of fitness and activity trackers manufacturer Fitbit Inc (NYSE:FIT) have been on a tear ever since the company struck a huge deal with Target (NYSE:TGT). Fitbit stock price has gained 19.5% over the last five days after the company struck a deal with the giant retailer to give each of its 335,000 employees a free Zip, a clip-on-tracker device that sells for $60. Target employees can purchase the company’s higher end devices with Target subsidizing the cost.

Fitbit five day share return

 Fitbit-3

Source: CNN Money

Investors are excited about the deal because its Fitbit’s largest corporate wellness program, and could see the company sell a lot more devices to corporations. Fitbit has previously partnered with different companies including BP (NYSE:BP), Time Warner (NYSE:TWX), and Bank of America (NYSE:BAC).

The corporate opportunity for Fitbit is solid. Although corporate services make up less than 10% of its revenue, this is likely to undergo considerable growth over the years. ABI Research estimates that more than 13 million fitness tracking devices will be integrated into employee wellness programs by 2018, up from just 200,000 two years ago. Moreover, Fitbit fitness trackers have demonstrated tangible ROI in employee wellness programs. Appirio, one of Fitbit’s wellness corporate partners, says that it was able to shave off 6% from its employee health care costs by wearing Fitbit’s fitness trackers. That’s a strong selling proposition for companies that would like to cut down on ballooning employee health care costs.

Fitbit Stock Could Face Short-term risks

The second reason why investors are excited about the Target deal is because stocks of companies with strong wellness exposure often receive a higher valuation. In the case of Fitbit though, the shares are already trading at a lofty 60 times expected 2015 earnings, so the wellness programs can only serve to justify the steep valuation rather than orchestrate it. So Fitbit shares are not likely to make sustained gains on the strength of the Target deal alone.

Then there is the Apple (NASDAQ:AAPL) Watch risk. I wrote an article some time ago where I argued that the market was overreacting to the implied threat by Apple Watch. My thesis hinged mainly on the premises that the market for smart wearable devices was expanding fast enough to comfortably accommodate two powerful brands. The IDC has projected that the market for wearable devices (both basic and smart devices) will expand at a healthy 42.6% annual clip through 2019.

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

Despite the healthy growth, there is a short-term risk that faces Fitbit. The company has been growing much faster than the market, and this is clearly not sustainable in an environment where competition is growing. We can deduce this much by looking at Fitbit’s expected market share during the current year and comparing it to the prior year.

According to the IDC, Fitbit sold 10.9 million devices in 2014, which translates to 41.3% of global shipments of 26.4 million devices. Fitbit has guided for revenue of $1.6 billion-$1.7 billion for FY 2015. Assuming Fitbit’s ASP per wearable device stays roughly flat this year, the company expects to sell about 18.8 million devices during the current year. Going by IDC estimate for device shipments during the current year, Fitbit is likely to end the year with a 26% market share. So while the company’s top line will still grow at a healthy clip, its market share could slide by a huge 15.3 percentage points in just one year. The investing world is likely to react negatively to such a huge slide in market share which could lead to poor share performance over the short-term.

Takeaway

Fitbit’s long-term outlook, however, remains bright. Unless the industry throws us a curve ball, the company’s brand is likely to remain the best-seller in the market ahead of Apple Watch, especially now that it has demonstrated it’s capable of clinching huge corporate deals, which is something Apple Watch is not likely to match. Fitbit’s wearable device market share is likely to stabilize in the low-to-mid 20s range, which is good enough for a market leader. Fitbit stock is a good long-term investment.

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