A press release unveiled by Fitbit Inc (NYSE:FIT) last month, along with statements by the company at a January conference, had mixed implications for Fitbit stock. The data in the press release indicates that the company continues to grow at a fairly healthy pace, is still quite competitive with Apple Inc.’s (NASDAQ:AAPL) Apple Watch, and should have significant monetization opportunities ahead.
However, Fitbit’s failure to provide data on the sales of its new Ionic smartwatch and metrics on its paid apps should be concerning to investors. Meanwhile, FIT stock’s comments at the conference suggest that its Q4 results were at least fairly good, and that it has a bright future overall, while Fitbit stock is significantly undervalued.
Overall, the information strengthens my belief that the company will ultimately either partner with or be acquired by Samsung Electronic.
Fitbit announced that its active user base “grew to more than 25 million” as of Jan. 3, 2018. That’s a roughly 7.7% increase versus the “over 23.2 million active users” that Fitbit cited a year earlier.
The data point has mixed implications. On the one hand, it indicates that the Fitbit’s overall sales and user base continue to grow significantly and that the company is not going to disappear into irrelevance anytime soon.
Additionally, assuming that analyst Horace Dediu’s estimate of 33 million Apple Watches sold as of September 2017 is correct, Fitbit is not that far behind Apple Watch. Using Dediu’s estimate and assuming that Apple sold 6 million watches from September to Jan., double the number that the analyst estimated it sold in the second quarter, its total sales of Apple Watches reached 39 million as of January. If we assume that 9 million people, or about 23%, of consumers who bought Apple Watches are no longer actively using the device, Apple would have 30 million active users as of the beginning of the year versus Fitbit’s total of “over 25 million.” Not exactly a huge lead for the tech gorilla.
However, of course, the data indicates that sales of Fitbit’s devices aren’t growing by leaps and bounds and that , for now, the Apple Watch has outsold Fitbit’s products.
More concerning for owners of Fitbit stock is the company’s failure to disclose any data on sales of the company’s new smartwatch, the Ionic. The omission indicates that a Morgan Stanley analyst may have been on target when he suggested that sales of the Ionic were weak last quarter.
Some Good News for Fitbit Stock
On the other hand, at the Jan. 17 conference, Fitbit VP, Investor Relations Thomas Hudson noted that consumers had joined Fitbit groups a total of 4.7 million times in the fourth quarter, up from 3.7 million in the third quarter, while 20 million unique users engaged with the company’s social feed, up from about 15 million during the previous quarter. This suggests that the company’s fourth-quarter results overall were at least fairly strong.
Hudson also noted that the company could benefit as more health insurers give their customers financial incentives to buy Fitbit devices. He also stated that the company’s devices could save the U.S. health insurance system a great deal of money by identifying expensive conditions like diabetes and depression earlier and by pushing users to exercise more, improving their health in the process.
Moreover, Hudson indicated that FIT could eventually obtain a portion of the money it will save the health system. adding that Fitbit “can monetize its anonymous health data.”
Making a case that Fibit stock is quite cheap, Hudson estimated that the company has $1 billion in assets, but had a market cap of $1.4 billion (the market cap of FIT stock has since dropped to about $1.25 billion).
“The market is giving us no credit for out community, durability, or our R&D,” added the executive who also asserted that the valuation of Fitbit stock would rise as the company obtained more recurring revenue from health insurers and other enterprise companies. Overall, Hudson made a good case as to why FIT stock is undervalued. and his comments indicate that the company’s Q4 results will be stronger than the market expects, and that the company has many upcoming potential growth engines.
Moreover, as I noted in September, the Ionic could become “a real monitor of multiple dimensions of people’s health.” A Roth Capital analyst made a similar point, saying that the company has “legitimate” digital therapeutic aspirations.
On the other hand, the company’s failure to provide additional data on the sales of its paid apps is not a good sign. In November Fitbit CEO James Park had reported that increased usage of the company’s Coach app, which provides exercise training videos to users, had “spurred a 75% year-over-year increase in the number of customers accessing the company’s premium apps,” as I wrote at the time. Even though Park had said that the revenue from premium apps was “immaterial,” I was hopeful that they could eventually significantly boost the company’s bottom line.
So how should we think about Fitbit’s position at this point? I believe that the company has a large and growing customer base, as well as significant growth and monetization opportunities and the proven ability to hold its own against Apple and exploit the growth of the wearables market. However, it likely needs access to more capital in order to increase awareness of the diagnostic power of the Ionic and to hire a large enough sales force to significantly exploit its monetization opportunities.
By partnering with or selling itself to Samsung, as I suggested in a previous column, Fitbit can obtain the capital it needs to achieve these goals plus increase its R&D spending to strengthen the Ionic’s capabilities even further.
I continue to believe that this is the proverbial “match made in heaven,” as partnering with or acquiring Fitbit would enable Samsung to boost its lagging wearables business, achieve its goal of improving its digital health business, and perhaps even bloody the nose of its archrival, Apple.
Consequently, I still think that Fitbit is radically undervalued at current levels, and that investors should buy FIT stock.
As of this writing, Larry Ramer owned shares of FIT stock.
