Fitbit Inc (NYSE:FIT) looks like dead money no matter how Wall Street looks at it. The deep discounts being offered for the merchandise indicate a severe demand problem with Fitbit stock.
The new Alta HR product is getting good reviews, but the category has plateaued. With Alta you can monitor your heart rate and get alerts from your phone, and the sleep tracking is improving, but most potential customers already have a tracker and don’t need a new one.
The bottom line is that the Alta is not medically accurate, consumer markets seem saturated, and that is not changing. The fourth-quarter results, a loss of $126 million on sales of $574 million, speaks to a company that has gone through the “S” curve of demand, come out the replacement side and has no second act.
So why did Fitbit stock rise nearly 5% on Monday? Maybe, with blood in the water, sharks are smelling a meal.
Why Buy Fitbit Stock?
Despite its product problems, Fitbit stock has value. The assets are worth $1.820 billion, well above the $1.3 billion market cap, and there is no debt. There was $706 million of cash and short-term securities on the books at the end of the year, so the company’s value “ex-cash” is barely $650 million, a little more than one quarter’s sales.
The stock may never recover, as our Tom Taulli says, and there’s not much meat on the bones, but what is there is choice. A private acquirer could squirrel away the cash, drop costs to the floor and wait for technology to deliver monitors that are useful to insurers or the medical profession.
There are indications this is what Fitbit is doing.
Fitbit could be an always-on version of the Medical Alert bracelet, allowing elderly patients to be monitored remotely by doctors or nursing staff, providing greater comfort and valuable data about the edge of the aging process. Add GPS to a Fitbit and children could be tracked, or checked closely during exercise for signs of stress that still kills.
FIT shook up its executive suite in the middle of March, replacing social mavens with tech veterans. The plan is to offer subscription services and seek wellness contracts with businesses that self-insure and want to cut costs. This won’t necessarily bring growth, but it could deliver hope for the future and allow the company to break even.
Fitbit, in other words, recognizes its problems and is looking to create an enterprise market. These are smart moves.
Too Late for You
No one in the public market needs stock in a company that has saturated its original market and is embarking on a long journey from wellness to illness and medical back-up. But there are plenty of companies for whom this might be a decent opportunity, and the price right now is dirt cheap.
A company like UnitedHealth Group Inc. (NYSE:UNH) could offer discounts to groups which buy trackers in bulk and let the insurer use the data as part of its Optum Group. A medical device company like Boston Scientific Corp. (NYSE:BSX) could create a consumer group for patients whose conditions don’t yet rate heart interventions but require monitoring.
A Chinese or Korean company would consider the price of Fitbit, ex-cash, to be a bargain, its brand name more than making up for its current weak business. A private equity group could profit from fixing Fitbit to any type of strategic buyer. Even if its planned smartwatch never becomes a mass market product it could deliver a profit to a strategic buyer.
Fitbit Stock Is Dead Money for Now
In the near term, however, there seems no direction for Fitbit to go but down.
Failure to get a trade secret trial with privately-held Jawbone Inc., which is also in survival mode, thrown out is going to be a drag on the company’s value to any acquirer. Maybe a merger with Jawbone, which is seeking new lawyers to continue its suit and is aiming new services to the medical market, would save both firms.
But those are questions for experts, and insiders. As a public investor, you have no control over the path management takes. You can either buy what they’re doing or sell out. My advice is to sell out of Fitbit stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
