Since peaking at around $50 a share in August 2015, Fitbit Inc (FIT) stock has fallen more than 88% to below $6.00 a share on Tuesday, after disappointing quarterly results. Fitbit stock investors fear that its margins will continue to slip amid greater competition, market saturation, thin margins and high abandonment rates.
However, stock prices sometimes move more than the fundamentals warrant. They rise and fall in a boom-bust cycle. Investors bid up the price of a stock too high, and then abruptly lose interest, causing the stock to fall too low.
This may be the case with FIT. Fitbit stock seems deeply discounted, trading at 0.7 times sales, 1.44 times book value and 3 times cash per share. And FIT stock looks cheap on other measures as well. For example, Fitbit stock trades at 1.51 times net current asset value and 2.35 times net net working capital, the liquidation value of the firm.
At these valuations, Wall Street basically considers FIT a dead company.
You don’t have to be that bullish on Fitbit stock to think that concerns may be overblown. FIT saw 23% revenue growth in the third quarter and remains profitable. The company may see a loss of 22 to 44 cents this year, but holds $3.00 in cash per share.
And although it may be maturing, wearables remains a young industry. Gartner, in a survey of the wearables market in the U.S., U.K. and Australia, put the penetration of fitness trackers such as the Fitbit Charge at 19% (early mainstream). And given this is in mature markets, room for growth in emerging markets such as China must be larger still.
FIT Remains the Market Leader in Fitness Bands
Fitbit leads the wearables market as a whole, and its lead is even greater in specific areas such as fitness bands. IDC put FIT’s share of the wearables market at 23% in the third quarter of 2016. The company’s share rose from the third quarter of 2015, when it accounted for 21.4% of devices sold, despite the entry of new competitors.
Among subsegments of the market, Fitbit’s lead appears even stronger. According to Kantar Worldpanel ComTech, FIT accounted for 75% of fitness bands sold in the fourth quarter of 2016.
How Fitbit Stock Benefits From Network Effects
As FIT becomes more of a platform, its leading position will allow it to benefit from network effects and help it resist commoditization. The value of a platform, such as Facebook Inc (NASDAQ:FB), increases as the number of users increases. After all, Facebook wouldn’t do you much good if none of your friends were using it.
But how can network effects benefit Fitbit stock? FIT is a fitness band you wear on your arm, not a social network like Facebook or a marketplace like Alibaba Group Holding Ltd (NYSE:BABA). But Fitbit is constantly emphasizing the social aspect, allowing people to share their exercises with their friends.
FIT found that, on average, users with one or more friends using the app took 700 more steps a day than those without. Laziness is a part of human nature, and just as people often lose the will to continue going to the gym and keep up their New Year’s resolutions, they stop using their fitness trackers.
Gartner put the abandonment rate of fitness trackers at 30%, but social engagement could mitigate this: If your friends can see whether you exercise, you become less likely to skip workouts.
If social engagement matters for fitness trackers, then Fitbit stock may benefit from network effects. FIT boasts a large community of users, with 16.9 million in 2015. This will help the company differentiate itself from the competition. If all of your friends are using Fitbits and recording and sharing their data on its platform, you’ll want to buy a Fitbit, and not a device produced by a rival such as Garmin Ltd. (NASDAQ:GRMN) or Fossil Group Inc (FOSL).