When it comes to the tech industry, turnarounds are fairly rare. The big problem is that it is incredibly difficult to keep up with the fast-moving developments in the industry. In fact, this is even more of a problem in the consumer devices category. Just look at some of the companies that have struggled, such as BlackBerry Ltd (NASDAQ:BBRY) and Nokia Oyj (ADR) (NYSE:NOK). The irony is that they have essentially moved into other segments!
OK, so might this also be the same predicament for Fitbit Inc (NYSE:FIT)? Well, I think so. The company faces severe challenges — and has been slow in correcting them.
Now, it’s true that Fitbit stock already seems to have factored in much of the issues. Consider that the company trades at a mere 0.61 times sales and has $726 million in the bank. There is also no long-term debt on the balance sheet.
But such things will likely not be enough to provide much spark for FIT stock.
Sour Numbers for FIT Stock
Already the fundamentals have deteriorated significantly. For example, during the all-important holiday quarter, the company posted a 19% drop in revenues to $573.8 million and the number of devices sold fell by nearly 19%.
And the following quarter saw even more problems. Note that revenues plunged by 41% to $298.9 million and the number of devices sold went from 4.8 million to 3 million.
The result is that Fibit has suffered a major drop in market share. According to a report from IDC, the company is now the No. 3 player (in terms of global shipments), behind Apple Inc. (NASDAQ:AAPL) and Xiaomi.
So what happened? Well, as should be no surprise, there are a plenty of reasons.
Yet when you drill down on things, there is something that really standouts out — that is, the company has not been able to adapt to the market. And yes, this seems kind of odd. Consider that Fitbit is the pioneer of the wearables industry and the company shells out a large amount on R&D (about 29% of revenues for the latest quarter).
But despite this, the fact is that old-line tech operators like AAPL and Samsung Electronic KRW5000 (OTCMKTS:SSNLF) have been the innovators. For the most part, they were early in the market to develop smartwatches.
This is important since mainstream consumers generally do not want specialized devices. According to InvestorPlace.com’s Richard Saintvilus: “Despite its luxury price, consumers are showing they prefer the Apple Watch with its broader functionality. Meanwhile, on the slightly lower end of the spectrum, there’s Samsung’s Gear S3, which allows consumers to pair their device with LTE wireless connectivity. In terms of features, not to mention price/value/functionality ratios, Fitbit has struggled to compete.”
Fitbit’s Response
As for the response from Fitbit, the company has acquired Pebble and Vector, which are players in the smartwatch market. But it looks like the efforts have floundered. Keep in mind that Fitbit was expected to launch a device in the spring. However, now it looks like that it will instead be for the fall.
Based on a report from Bloomberg.com, Fitbit has lost some key employees for the project and it appears that it has been a challenge to attract app developers. Let’s face it, why take a risk on a new device when AAPL already has a solid offering?
Actually, this is perhaps the reason a deal with Spotify did not work out.
Granted, Fitbit responded by emphasizing that things are “on track.” But then again, the company has been overly optimistic many times over the years. So I think there should be some skepticism.
All in all, the upcoming smartwatch is a make-or-break for Fitbit stock, as it looks like the company’s traditional products are rapidly fading. Unfortunately, the company is at a major disadvantage. Not only does it need to develop a thriving ecosystem of app developers — which is likely to be very expensive and time-consuming — but the company will be several years late to the market, as AAPL is expected to launch its third generation offering by the fall.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
