Stick to what you’re good at — that was the resounding message from investors after Fitbit (FIT) announced the Fitbit Blaze, a “smart fitness watch” at CES this week. Investors sent the stock plummeting after the announcement of the $200 smartwatch, which is aimed to compete with Alphabet‘s (GOOG, GOOGL) Android Wear smartwatches and Apple’s (AAPL) Apple Watch.
FIT stock has been extremely successful in the low-end fitness-centric wearables market. The company sold 4.7 million devices in the third quarter, more wearables than any other company.
But its attempted entry into smartwatches is giving FIT stock investors fits.
Fitbit Blaze Doesn’t Fit in the Market
The Fitbit Blaze is a smartwatch, just like the Apple Watch and the dozen or so Android Wear watches from various manufacturers. No matter how Fitbit tries to position or market the device, other smartwatches are its competition.
And it falls incredibly short.
The Fitbit Blaze offers the ability to receive alerts from incoming phone calls, text messages and calendar alerts from your smartphone; monitor your heart rate; automatically track workouts; and control music from a smartphone. That’s it. There are no third-party apps, no custom alert settings and most egregiously, no ability to reply to texts or phone calls.
All this adds up to a poor-man’s Apple Watch. And with the Apple Watch available for as little as $249 at Best Buy (BBY), that poor man is giving up a lot for $50.
Why Fitbit Stock Was Punished
With device sales growing 100% year over year and a solid leading position in the growing fitness wearable market, FIT management should be allowed one misstep, no?
The problem investors have with the Fitbit Blaze seems to be that Fitbit is admitting its faults and doing a poor job of facing its threats. As a result, Fitbit stock plummeted more than 18% as management showed its ineptitude in battling smartwatches like Apple’s.
The real threat to Fitbit stock isn’t that someone comes along and makes a better fitness tracker. Fitbit has the brand equity to withstand competition on that front.
The real threat to Fitbit stock comes from devices like the Apple Watch subsuming the fitness tracker market entirely, just as the iPhone made the mp3 player and Palm Pilot irrelevant. Fitbit essentially admitted as much with the introduction of the Fitbit Blaze, and it showed that it’s not ready to fight that battle.
The Fitbit Blaze also indicates a desire from Fitbit to move upmarket. The average selling price of a Fitbit device in the third quarter was $84. The $200 Blaze is not the company’s most expensive device (the GPS-enabled Surge is $250), but it looks to make up revenue with fashionable bands a la the Apple Watch.
High-end devices not only provide higher profits (just ask Apple), they also reduce abandonment.
When FIT stock filed its S-1, it included the number of paid active users. That metric is defined as “a registered Fitbit user who, within the three months prior to the date of measurement, has … logged at least 100 steps with a health and fitness tracker or a weight measurement using an Aria scale.” As of Q1 2015, just 50% of Fitbit’s registered users were paid active users.
Fitbit notably dropped the metric from its 10-Q filings.
A high-end device is harder to abandon due to the cognitive dissonance involved. A rational person wouldn’t spend $200 on a device that sits in a drawer. Management’s attempt to add another high-end device to the lineup is an admission that Fitbit stock investors should take note of.
The market may have overreacted to the announcement of the Fitbit Blaze. But if management doesn’t follow up and correct the issues with the device, Fitbit stock will suffer the consequences as smartwatches take a larger portion of the wearable market.
As of this writing, Adam Levy owned shares of AAPL.
