Fitbit (FIT) stock took a pounding on Tuesday after Microsoft (MSFT) unveiled the Microsoft Band 2, the newest version of its wearable fitness tracker. Fitbit stock fell more than 4% on the news.
Sometimes Wall Street can be awfully shortsighted.
I completely understand how the knee-jerk reaction might be to abandon FIT stock before big, bad Microsoft gobbles up market share, but there are a few reasons why that line of thinking won’t yield results.
The Market Is Growing by Leaps and Bounds
If you own Fitbit stock in your personal portfolio, as I do, it’s imperative that you know one thing: Fitbit is going to lose market share, and that’s perfectly OK.
Fitbit was a first mover in the wearable fitness biz, and that’s given the company an early — and unsustainable — lead that will likely continue to slide as competitors enter the lucrative industry.
Just have a look at the numbers: IDC calculated Fitbit’s market share at 30.4% in the second quarter of 2014. A year later, in 2Q 2015, its market share had fallen to 24.3%.
Pretty bad for FIT stock, right?
Not when the market’s growing like a time-lapsed teenage ogre. 2Q shipments surged 158.8% as the total wearables market more than tripled, expanding 223.2%.
The Microsoft Band 2 may take a customer or two here and there, but just like the Apple Watch, its impact on FIT stock and the Fitbit brand shouldn’t be overestimated.
Not the First Competitor
When Apple (AAPL) dropped the Apple Watch earlier this year, investors initially thought it would be the bane of Fitbit’s existence.
How did FIT stock respond? Well, it went public in June, after the April 24 Apple Watch debut, and after jumping by about 50% on its first day, Fitbit stock rose another 22% from there.
The effect of the Speedo Shine release in August is yet to be seen, but color me skeptical that the ability to track strokes in the pool will be the downfall of FIT stock.
Although the Microsoft Band 2 has the normal features like calorie and sleep tracking, as well as some cool integration with apps from Uber, Starbucks (SBUX) and Twitter (TWTR), it’s priced at $249 — far higher than most Fitbit models, which range from $59 to $249.
Brand Strength and Network Effect
By establishing its footing in the wearables market early, Fitbit has built a fervent follower base and, more importantly, has begun to build its own sustainable competitive advantage, the “network effect.” Simply put, this is the same reason Facebook (FB) and LinkedIn (LNKD) are so revered: Lots of people use them. Good luck building another network with 1.4 billion users.
This social component has been adopted by Fitbit, and users can engage in competitions with one another to see who takes the most steps or burns the most calories in a given time period.
With Fitbit’s recent courting of corporate customers looking to keep healthcare costs down, like Target (TGT), Bank of America (BAC) and others, that network effect is only growing stronger.
Bottom Line
At the end of the day, this market is white-hot and Fitbit’s the leader. Microsoft has never been known for its coolness factor, and that’s unlikely to suddenly change with the release of the Microsoft Band 2.
The more Wall Street and the media ruminate on the new release from Microsoft, the more Fitbit stock will become a bargain.
As a Fitbit bull myself, I’ll take what the market gives me, every day.
Can the Microsoft Band 2 count my profits for me a year from now?
As of this writing, John Divine was long FIT stock, AAPL stock and FIT Jan 2016 $38 call options. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
