Why Fitbit Inc (NYSE:FIT) isn’t Under Siege


So much has been said about how Fitbit Inc (NYSE:FIT) could soon or later begin to experience market share squeeze from both the top and the bottom. Bears like to point out that Apple Inc. (NASDAQ:AAPL)’s Apple Watch will cut off Fitbit from the high-end market and China’s Xiaomi will take share from Fitbit in the low-end market.

The picture painted by bears may make one think of Fitbit as a company that is soon coming under siege and with no hope of survival. That may be true until you take time to understand Fitbit – what it has done, what it is doing and what it can do.

Fitbit’s competitors

Fitbit Inc (NYSE:FIT) sells wellness/fitness products that comprise devices, services and platform. Apple is vying for the same market with a hybrid wearable that is claiming to be an extension of the iPhone and a fitness tracker. You can play music from Apple Watch and also use it to track your fitness activity because, among other fitness functions, it monitors heartbeat. The entry level Apple Watch costs $350 and costs can go as high as $17,000 for the gold edition Apple Watch.

Xiaomi is also cited as a potential threat to Fitbit’s business. The Chinese company manufactures and markets low-cost fitness wearable devices. Xiaomi’s fitness trackers can be purchased for as low as $15. Fitbit’s entry-level wearables cost about $130.

Where is the effect of competition?

Fitbit Inc (NYSE:FIT)’s sales figures have not only continued to soar even with the entry Apple and Xiaomi in the wearable market, but the company also commands a strong lead in the fitness tracker space with an estimated 88% share of the market. That shouldn’t surprise anyone because Fitbit is also leading in the sale of fitness wearables to enterprises, and there is more to the company’s strength than competition can damage in a short time as outlined in this Fitbit analysis.

Although many like to cite potential competition from Xiaomi, it will take the Chinese company years before it can make meaningful headway in the U.S. wearable market where Fitbit leads in retail presence. Fitbit boasts a large retail distribution network in the U.S., with about 48,000 distribution channels.

The company’s market share also rose to about 88% in 3Q2015 compared 68% in 2014 and 58% back in 2013.

Capture

Interest in wearable devices

Wearables is a young but promising consumer electronics category. Not only is consumer interest in smartwatches and activity trackers on the rise, but retailers are also increasingly relying on wearables to drive store sales and foot traffic.

Several retailers reported in 3Q2015 that wearables were responsible for the gains in their consumer electronics categories. Target Corporation (NYSE:TGT) in particular registered a 100% spike in comparable store sales in the wearable category.

That is happening at a time when consumer interest in Fitbit brand wearables is soaring going by various indictors.

Google Trends:

A look at Google Trends reveals that Internet search for Fitbit-related products has been trending upwards since at least the beginning of 2013. Google Trends search activity can be used to assess consumer interest in a product and if that’s true, consumer interest in Fitbit brand is building up.

Black Friday discounting:

Another indicator of Fitbit Inc (NYSE:FIT)’s brand power can be seen from the way retailers promoted various wearable devices during Thanksgiving/Black Friday holiday.

A check on various major retail sites showed that Fitbit wearables were less discounted on the Black Friday than other wearables such as Apple Watch.

That shows that retailers noted that Fitbit products needed little or no push to get them moving compared to other wearable brands.

Marketing budget

As much as Fitbit Inc (NYSE:FIT)comfortably leads the wearable tech market and enjoys strong brand power/recognition, the company remains committed to driving more interest in its products.In the current quarter alone, the management intends to spend more than $100 million in marketing Fitbit wearables. The company is driving marketing campaigns in 28 nations in the back half of this year compared to eight nations last year. The marketing budget should both translate into more holiday sales than last year and increased brand awareness or stickiness.

Corporate wellness sales

Fitbit Inc(NYSE:FIT)is aggressively pushing into the enterprise wellness market. The company claims to have enrolled at least 70 of the Fortune 500 companies are continues to target more. In the last few quarters lone, the company added 20 more companies to its corporate wellness program.

Fitbit’s enterprise customers buy fitness devices in large quantities and distribute them to their employees as part of their efforts to cut employee healthcare costs and encourage healthy living. BP plc (ADR) (NYSE:BP) alone has purchased more than 45,000 Fitbit trackers for its staff. Barclays and Target are other large Fitbit purchasers.

Although Fitbit sells to corporate customers at a discount to the retail price, the company is still able to capture decent profit margins given that it sells directly.

Currently, corporate channels contribute 10% of Fitbit’s revenue, but there is more growth headroom in the segment as more companies realize the benefits of encouraging employees to be more active.

Besides the direct sales benefits that Fitbit generates through the enterprise channel, the program also helps to boost the profile of the company in the fitness wearable market. That is partly because the company is building a high quality reference base and also stands to benefit from the halo effect of selling to large enterprises.

Additionally, Fitbit can improve its enterprise ARPU by ascending users in the category to more expensive hardware or services.

Customer lock-in

Fitbit Inc (NYSE:FIT) is not only selling fitness devices/software, but the company is more interested about building and ecosystem business. Through its wellness platform and related fitness services and products, the company is able increase customer stickiness. With that, Fitbit can extract more value from its customers over a longer time than rivals.

Revenue growth

Fitbit’s revenue growth over the last several quarters has been compelling and there are indications that the trend will continue. Despite the fears about mounting competition, Fitbit posted a decent spike in 3Q2015 sales from 2Q2015 and also compared to a year ago.

Financials

Fitbit Inc (NYSE:FIT) finished 3Q with more than $462 million in cash and equivalents, an increase of about $1 million from the previous quarter.

The company generated $409.3 million in revenue in 3Q, up a whopping 167.7% YoY and comfortably above the consensus estimate of $347 million.

In the current quarter, the management modeled revenue in the range of $620 to $650 million. The consensus calls for revenue of $571 million.

Bottom line

Wearable tech market will become competitive overtime as the industry grows, but Fitbit Inc (NYSE:FIT) is equal to the challenge in its industry.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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