The market doesn’t seem to notice, and investors don’t seem to care, but Fitbit Inc (FIT) very quietly moved into the wearables payment space this week by acquiring intellectual property and key personnel developed by the startup company Coin.
That said, FIT stock is already ridiculously cheap and has been kept lower due to negative investor sentiment.
While there will naturally be skepticism regarding whether Fitbit can make payments work with its hardware, the bigger underlying catalyst is that it represents a move into services that can reverse negative sentiment and allow FIT stock to realize its underlying value.
Investors Are Not Buying Hardware
If there’s one thing we have learned about technology over the past five years, it’s that investors no longer buy the long-term prospects of hardware sales.
Fitbit serves as proof: the company grew revenue 150% last year, is expected to grow 38% this year and has achieved this growth due to beating and raising its forecast in each quarter since going public last year. Hence, there is no hardware company that has performed better than Fitbit, yet FIT stock is down 52% since going public.
Just about all Big Tech companies that once relied on hardware sales have switched to a software-and-services subscription business model. This includes Microsoft Corporation (MSFT), Oracle Corporation (ORCL), SAP SE (ADR) (SAP) and just about every Big Data and cloud company in between.
What Does This Have to Do With Fitbit?
Clearly, Wall Street has big problems with how Fitbit does business, and it does not matter that Fitbit actually gained market share in the latter parts of 2015 and into 2016, despite new competition from the likes of Apple Inc. (AAPL), Alphabet Inc (GOOG, GOOGL) and Samsung (SSNLF) among others. Fitbit has established itself as the quintessential king of wearables, with its CEO understanding the industry and what consumers want better than any company out there.
However, when a company’s entire business model centers around launching newer, more expensive products that cannibalize the old lineup, the market becomes skittish.
In other words, the market is always looking ahead no matter how successful Fitbit is in the present, and always doubts regardless of how many quarters Fitbit raises guidance. For this reason, Fitbit must change, and the acquisition of this technology is step one.
What happens now is entirely up to Fibit and its management team.
What Fitbit Can Do
The company sold 4.8 million devices in the first quarter, and over two million were its newest products, the Alta and Blaze. The Blaze was the company’s first smartwatch, and because of its success, chances are that most new Fitbit products moving forward will be smart wearables, an industry growing far faster than basic wearables.
Once Fitbit implements payments, it then creates a channel to collect revenue from transactions, or to create revenue from new services that it offers. For example, the Blaze comes standard with four different screens that the user can choose from. Fitbit could develop a library of screens that show different data points with various designs and charge for that software the same way it charges users for interchangeable bands.
Another possibility is to expand the FitStar personal trainer program, which delivers workouts to users when requested. Fitbit already collects tons of data from its users, like 24-hour heart rate, sleep patterns, minutes of activity, food intake, water intake, and of course, calories burned. Fitbit could take FitStar to the next level with more personalized workouts and overall health and wellness plans based on the specific data it collects.
As a result, Fitbit would then become a services business with a recurring revenue stream.
And while the company has not yet disclosed its intent to go in this direction, the fact that it acquired payment technology, and plans to incorporate services into the Fitbit arsenal of features suggests that it is taking a much bigger interest in smart wearables and is preparing to launch services with future hardware.
If that happens, expect sentiment to reverse higher and for FIT stock to trade toward the multiples it rightfully deserves.
As of this writing, Brian Nichols was long FIT.