Two years ago, Fitbit Inc (NYSE:FIT) was selling about 11 million wearable health monitors and shares were on their way past $50. Annual sales have since doubled, but as competitors step up, margins and the charts have cratered. At this point, Wall Street thinks FIT stock is barely worth $7.
However, I think the pundits may be aiming a little low — provided, of course, management can bring sizzle back to the brand and product development cycle.
The central challenge for FIT is that while it was initially priced as a world-changing technology play, its real-world market footprint lately has played out a lot closer to conventional consumer electronics. As a result, while the bulls could justify a multiple as high as 7X revenue at its peak, the company as it stands today is relatively fairly valued at barely 1X revenue when you consider that the existing product line struggles to support sustainable margins as it is.
For FIT to leap back to high-tech unicorn status, it needs a bona fide category-creating device, the kind of breakthrough that Apple Inc. (NASDAQ:AAPL) made with the initial iPod and then with the iPhone. It needs to be more than just a phone you can wear — AAPL is discovering that now with the long frustration around the Apple Watch.
Kiss of Death
Fitbit’s next device needs to have unique and compelling functionality to compete with the mobile computing form factors that already have market comfort behind them, and as a fashion accessory it needs to be beautiful to earn its space on the wrist.
When FIT unveiled its initial smartwatch, the kiss of death was that it really felt more like a souped-up wristband than a shift to a new brand universe. If I had the ear of the management team, I’d make sure they understand the difference between small steps and great leaps.
Wall Street bought the great leap. Now the market is killing the company as we take 10 steps back.
Innovate Even Harder
For example, I’ve always insisted that a full-spectrum medical monitor would be a compelling product to sell to health-conscious consumers and cost-conscious insurance networks alike.
With the right sensory array, a next-level FIT product could sense blood glucose, cholesterol and other factors on or just below the skin, then communicate that information to another device that tracks the trends and alerts the wearer or a physician if the parameters get too far off base. Dangerous patterns get noticed and intervention comes before they become emergencies. Lives are saved. I think that’s a product many would find worth buying.
Now, that might not be a product a lot of joggers will grab at a department store, but it’s the kind every doctor will want to sell as part of a larger telemedicine “wellness” monitoring program. AAPL can’t do that yet. And when it pushes the Apple Watch in that direction, FIT will need to innovate even harder to find that elusive killer app and remain relevant.
But that’s just one idea. Another option that would push FIT stock off its lows would be if the device maker shed its medical focus and concentrated on other vertical prospects.