Wearable superstar Fitbit Inc (NYSE:FIT) is certainly glad that the calendar rolled over to the new year. That’s because Fitbit stock spent much of 2016 falling like a stone.
As it turns out, wearables aren’t the highly prized item many analysts and market pundits thought they were going to be.
A steep drop in sales caused some significant declines in FIT over the past year. Recent Fitbit stock downgrades and questions about Fitbit’s ability to survive as a standalone company didn’t help either.
With shorts continuing to circle, Fitbit is trying to reinvent itself via a series of buyouts and acquisitions. On the surface, this seems like a good idea for FIT. The unfortunate thing is that the buyouts really just reinforce the idea that Fitbit is a one-trick pony.
In the end, FIT’s latest moves to help save itself will do nothing of the sort.
Fitbit Buys Another Watchmaker
Fitbit CEO James Park could be a very stubborn man. Why else wouldn’t he be listening to the data that shows the smartwatch and wearable market as dying? And it is dying — by a lot.
Just last month, research firm eMarketer lowered its growth forecast for the wearable device market by more than half. Analysts there now predict that 2016 will only see wearable growth of 24.7% — down from an estimated 60%.
That projected growth number may seem high, but it’s the quarter-over-quarter drop off that’s the most troubling. According to tech-sector data provider IDC’s latest Worldwide Quarterly Wearable Device report, the overall wearables market grew just 3.1% in the third quarter of 2016. That’s down from a 26% growth rate achieved in Q2 and far off the 67% mark from Q1.
Both eMarketer and IDC both cite smartwatches as the big reason for the declines. Consumers just can’t see the need for them as they overlap on features already found in smartphones. And when adding their heftier price tags, smartwatches are a fading fad. The best-selling devices on the two researcher’s surveys are still lower priced and basic fitness/activity trackers that count steps, heart rate and potential calories burned.
So what is FIT doing? It is buying another smartwatch maker.
In less than a month after buying smartwatch pioneer Pebble, FIT has decided to write a check for London-based smartwatch maker Vector for an undisclosed sum. Vector makes high-end smartwatches that resemble modern watches. Some of its models cost upward of $700. Like Pebble, Vector had been struggling to gain significant share in the wearables marketplace.
As with the Pebble acquisition, FIT is most likely after Vector’s intellectual property assets. The two buyouts and their rich patent portfolio could mean that a Fitbit-branded smartwatch is quickly coming down the pike relatively soon.
What Is FIT Thinking?
And while some investors may get excited over a Fitbit watch, that really might not be the best move for FIT stock. As the data have shown, smartwatches aren’t the way to go. Heck, Apple Inc. (NASDAQ:AAPL) can’t even catch fire in the sector.
These devices simply haven’t caught on with the general public and with complete wearable penetration now only estimated to be about 20% of the population by 2020 — up from today’s 15% — there’s just no sense in designing and selling one of these devices.
The real problem for FIT is that it doesn’t see the writing on the wall.
Even worse for FIT stock and the reason for its massive 75% decline over the past year, is that its potential plans just reinforce the idea that the firm is a one-trick pony. All it does is activity trackers. So adding another product to an already declining market isn’t necessarily the best business strategy.
At least other makers of wearables — Apple, Garmin Ltd. (NASDAQ:GRMN) — have full product catalogs to back them up. FIT isn’t so lucky on that front, and its latest moves only entrench it deeper to the shrinking category.
With zero in debt, bankruptcy for Fitbit isn’t an issue. But being relegated to the dustbin of consumer tech products is. Rather than diversify and expand out, the firm is just doubling down a product that excites fewer people each day.
Sure, it is the wearable leader in its activity trackers, and maybe it’ll get a few of its core customers to upgrade. Realistically, though, those people who want a smartwatch, already have them. Until the rest of us figure out what good are they, FIT’s move into the sector will be for not.
And investors seem to agree. Fitbit stock dropped by 6% on the day the Vector deal was announced. I suspect it’ll fall further as wearable sales continue their slow descent. Fitbit continues to be a big sell.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.