Back in June 2015, one of the hottest IPOs was Fitbit Inc (NYSE:FIT), which soared 52% on its first day of trading. The company was heralded as the next big thing in the fast-growing wearables market. But off course, the euphoria would eventually turn into a nightmare for investors. During the past year, Fitbit stock has lost a grueling 74% of its value.
Now, it’s true that the IPO market can be extremely fickle — and there are many examples of turnarounds. However, with Fitbit stock, there are grave fundamental issues. And yes, these could last for the long haul.
The irony is that the company’s management has made plenty of savvy moves, which is why FIT stock had such a strong reception. The company was the early mover in the wearables market, having been founded back in 2007. Fitbit was extremely aggressive with R&D, marketing and distribution, such as with the establishment of a massive retail footprint.
Even though the company would have periodic problems, such as with quality control, there was little doubt that it was focused on creating standout products.
The Rise and Fall of Fitbit Stock
As is always the case with the emergence of a high-growth market, it did not take long for rivals to move in. Part of this came from plenty of startups, which took advantage of the flush venture capital funds.
But there were also moves from established companies like Garmin Ltd. (NASDAQ:GRMN), Microsoft Corporation (NASDAQ:MSFT) and Samsung Electronics (OTCMKTS:SSNLF). These operators not only leveraged their tremendous financial resources, but also their strong brands and massive customer bases.
Yet the company that has had the biggest impact has been the mighty Apple Inc. (NASDAQ:AAPL). Even though the Watch is a broad-based device, there are still important health and fitness tracking capabilities. Besides, AAPL has been able to capitalize on its thriving ecosystem of developers, retailers and distribution partners as well seamless connections with other AAPL devices.
Unfortunately, FIT has not done a great job in innovating its product line lately — or at least creating devices that gin up lots of excitement. The fact is that the demand for the Charge 2 and Flex 2 have been lackluster. And this has been evident in the latest earnings report, in which FIT announced bleak guidance. Revenues are expected to inch up 2% to 5% on a year-over-year basis to $725 million to $750 million. The Street, on the other hand, was pegging $985 million.
Of course, Fitbit stock took another dive on this news.
The irony is that the company is no slouch when it comes to plowing money into R&D. The expenditures are at a hefty 15%.
Although, even if FIT is able to get back on track, it may not matter much anyway. Let’s face it, Fitbit devices seem more of a niche. How many people really need — or want — to track their vitals? And for those that do, is there much need to upgrade on a regular basis?
There are already ominous signs that the wearables market is getting to peak levels. Just take a look at an ominous report from IDC, which shows that the growth rate was a mere 3.1% in Q3. Keep in mind that it was 67% in Q1!
Then there was a report from analysts at Deutsche Bank, which stated: “We continue to view Fitbit as a leader in the wearable fitness category, but given consumer demand appears to be waning for wearable devices, we are taking a wait-and-see approach to the name.” In line with this, the investment bank dropped the price target on Fitbit stock from $18 to $9.
Oh, and there is also a study from Gartner, which surveyed people in the U.S., U.K. and Australia. One of the conclusions was that 30% of those who had owned a wearable no longer do so. The report also showed that 35% of the respondents said that they believe that a smartphone is all that is needed.
As InvestorPlace.com’s Aaron Levitt recently noted: “For the most part, those who want these devices already have them.”
The Bottom Line On Fitbit Stock
Now, it’s true that there may be an opportunity in the healthcare space for FIT. For example, the company has signed a deal with Medtronic PLC (NYSE:MDT) for the launch of an app that allows for monitoring of diabetes patients.
Then again, FIT will need to fight tough competitive forces. After all, in September AAPL signed a deal with Aetna Inc (NYSE:AET) to subside the Watch for healthcare purposes.
What’s more, the healthcare industry has long sales cycles and tough regulatory requirements. And again, there remain the issues of adoption. How many people will wind up using devices?
For the most part, Fitbit is in a really tough spot. The company’s products are not catching fire — and it also looks like the overall market is saturated and the competitive forces are intense. It’s an environment that makes it incredibly challenging. In fact, it’s similar to what other once-great device makers, like BlackBerry Ltd (NASDAQ:BBRY) and Nokia Corp (ADR) (NYSE:NOK), have faced. Of course, they have remained dead money for quite some time.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
