New President-elect Donald Trump places corporate tax reform, including repatriation of overseas earnings, high on his economic agenda. This will affect cash-rich tech companies such as Apple Inc. (NASDAQ:AAPL), which hold billions of dollars overseas.
Now might be the time for Apple to start thinking about what it wants to do with the money, including possible acquisitions.
Smart acquisitions could boost the price of Apple stock by increasing earnings per share, bringing in talent and strengthening Apple’s ecosystem. Buying Fitbit Inc (NYSE:FIT) would strengthen Apple’s position in the wearables market, which should help AAPL stock in the long run.
Currently, the wearables market faces pain, as slower-than-expected growth chips away at stock prices. But wearables, including fitness trackers, remains a young technology, still in the early stages of growth.
Demand for wearables should remain strong as consumers age and become more health-conscious, and workplaces and insurers encourage their purchase.
In a recent survey of the U.S., U.K. and Australian markets, research firm Gartner put the penetration of fitness trackers at 19% and smartwatches at 10%.
And Brian Nichols of Investorplace.com recommended that Apple buy Fitbit in April. I don’t think the case for Apple buying Fitbit has weakened since then; Fitbit stock is probably an even better value buy right now.
Why Apple Should Buy Fitbit: FIT Stock Trades at Low Multiples
The market has savaged Fitbit stock over the past year, and it has fallen 60% over the past year. Indeed, the stock has been falling since 2015, when it traded at $50 a share. Apple would be buying FIT at near-bargain basement prices.
Fitbit stock trades at 0.69 times sales and 1.42 times book value. Cash accounts for 37% of FIT’s market cap, with $2.97 per share. Fitbit’s enterprise value is 3.85 times EBITDA. Fitbit also trades at 2.06 times net current asset value, which Jonathan Heller recommended it for.
Investors tend to overreact; in a fit of irrational exuberance, they sent Fitbit stock up from its IPO price of $20 in June 2015 to $50 a share by August 2015. Now, the market is probably overreacting in the opposite direction: pricing in the worst-case scenario.
Fitbit stock already trades at 3.22 times net working capital, its liquidation value; how much lower can it go?
At such low prices, the risk of Apple making a mistake by buying FIT is very low.
Why Apple Should Buy Fitbit: More Services Revenue
Purchasing Fitbit would also help Apple increase its revenue from services.
Mark Spoonauer noted that by buying FIT, Apple could accelerate the adoption of Apple Pay. New Fitbit devices could come preloaded with Apple Pay. The mobile payments industry exhibits network effects: with more people using Apple Pay, more merchants will decide to accept payments from Apple Pay. 17 million people use Fitbit devices daily.
FIT stock already is developing wearables that can make payments, having purchased Coin’s wearable payments division. Both Fitbit and Apple Pay use NFC technology, so making them work together shouldn’t be too difficult.
Also, Apple is interested in digital health, and wearables can be a source of subscription revenue from health services. Fitbit users can pay $39.99 for a one-year subscription to FitStar Premium to access workouts and other personalized services.
Why Apple Should Buy Fitbit: Synergies
An Apple purchase of Fitbit should unlock some synergies: 1 + 1 = 3.
Apple will be able to integrate Fitbit’s 17 million active users into a network with Apple Watch users. Social engagement matters for wearables, since people tend to use fitness trackers less if they don’t have friends using them too. Fitbit found that users with one or more friends using Fitbit took 700 steps a day more than those without. FIT’s greater market share means that people are more likely to know someone using a Fitbit than an Apple Watch.
Also, one of Fitbit’s challenges as a small company is competing for tech talent. Inside Apple, the world’s No. 1 tech company, it could access more brains, and they could work together and share knowledge, rather than competing. FIT stock’s R&D costs are going up, and combining with Apple could perhaps reduce duplication.
Additionally, there will be opportunities for cross-selling. Apple sold Fitbit products at Apple stores until 2014, when it removed them, as FIT refused to make its devices work with Apple’s HealthKit. This remains an annoying problem for users of Apple devices and Fitbit products. If Apple purchased Fitbit, it could resolve this problem.
AAPL Should Buy FIT
By buying FIT, Apple could strengthen its position in wearables, where Fitbit currently holds the leading position. Apple need not worry too much about Fitbit devices cannibalizing Apple Watch sales: some make the case for using both.
Fitbit fitness trackers do not offer as many features or apps as an Apple Watch, and sell for less. And Fitbit trackers have longer battery lives, allowing users to sleep while wearing the device when they would need to be charging their Apple Watches.
Also, a purchase of Fitbit fits in with Apple’s avoidance of large purchases, as Fitbit is worth some $1.8 billion. Buying Fitbit now will give Apple the chance to unlock a great deal of value at a low price. Apple stock should benefit in the long run.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
