Fitbit Inc Will Get Boost From Google Deal, Other Catalysts

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Fitbit stock - Fitbit Inc Will Get Boost From Google Deal, Other Catalysts

Source: Fitbit

Fitbit Inc’s (NYSE:FIT) first-quarter results, reported on May 2, weren’t great, and the Street was upset by the company’s lower than expected second-quarter guidance which came in below expectations. But there are many silver linings for Fitbit and Fitbit stock that the Street appears to be overlooking.

First of all, the Street is underestimating the potential impact of the company’s deal with Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL). Most of the stories I’ve seen about the partnership are focusing on Fitbit’s use of Google’s cloud and healthcare API system. But during Fitbit’s third- quarter results conference call on May 2, CEO James Park clarified that “the companies will also look to work together to help better manage chronic conditions like diabetes and hypertension by using services such as Fitbit’s recently acquired Twine Health.”

Google Will Lift Fitbit Stock

Park also mentioned that Google will provide “engineering resources” to Fitbit and added that the companies will be “working together to transform the future of wearables.” The fact that the statements referenced “working together to transform the future of wearables” and Google providing “engineering resources” to Fitbit indicates that Google will probably use its considerable funds, human capital, marketing abilities, and connections to boost Fitbit, its products, and its overall business. In the process, Fitbit’s profit and Fitbit stock will also be lifted.

 

A number of other companies that have partnered with Google have become quite successful as a result of the collaboration. For example, sales of Chromebooks, which are made by Google in partnership with PC makers, grew by 38% in 2016 at a time when overall PC shipments fell by around 6%. That took market share away from Windows laptops. Chromebooks also revitalized the fortunes of Taiwanese PC maker Acer, according to a Forbes contributor. If the partnership between Google and Fitbit sparks 38% growth in the sales of Fitbit’s products, and we assume that Fitbit’s 2018 revenue guidance of $1.5 billion is accurate, Fitbit’s 2018 revenue would exceed $2 billion. Fitbit stock would become much more attractive.

The partnership between Google and Samsung has also helped Samsung sell many hundreds of millions of cell phones. (Other cellphone makers that have partnered with Google, such as HTC and LG, have not been nearly as successful.)

Other Boosts for Fitbit

In the past, I outlined multiple ways in which a potential deal with Samsung could boost Fitbit. I pointed out that “Samsung can use its massive coffers to make Fitbit’s capabilities more widely known. And the Korean giant can enhance Fitbit’s capabilities further by enabling the American upstart to spend more money on R&D.”

Fitbit could derive those same benefits by partnering with Google. Furthermore, the exceptional ingenuity and inventiveness of Google leave it better positioned than Samsung to help Fitbit create innovative new offerings. As a result, the partnership with Google makes a deal with Samsung largely unnecessary and definitely makes Fitbit stock extremely attractive at current levels.

Additionally, Fitbit’s second smartwatch, Versa, appears to be selling much better than its first one, the Ionic. The company noted that pre-orders of Versa have been “strong,” while the first week of sell-through sales of Versa in North America were better than that of any other Fitbit device in the history of the company. The smartwatch maker also noted that the second week of sales of the device in North America showed “continued strength.”

Meanwhile and very importantly, Fitbit continues to strengthen its connections with and value proposition for health insurers and other healthcare entities.

Acquiring Twine, a HIPAA-compliant connected health platform, and the partnership with Google certainly makes Fitbit a more appealing partner for healthcare entities. The fact that the company has worked with the FDA increases its credibility and gives it more connections in the healthcare field, as does its addition of a medical director and a board member with extensive experience in the health insurance field.

Bottom Line on Fitbit Stock

Finally, there are many encouraging aspects within Fitbit’s results and guidance. Sales in the company’s APAC region jumped 33% year-over-year to $23 million, indicating that Fitbit’s products are becoming much more popular in East Asia. Recurring revenue from Fitbit Coach, the company’s training videos, and from its deals with healthcare entities rose 30% year-over-year. Over time, as the company promotes Coach and makes greater inroads with the healthcare community, revenue from these categories should meaningfully and positive impact its financial results. And of course, as Fitbit pointed out, its costs are declining while its gross margins are increasing and demand for its fitness trackers appears to be stabilizing.

There are, of course, risks to investing in Fitbit stock. Apple Inc. (NASDAQ: AAPL) or Garmin Ltd. (NASDAQ:GRMN) could create a killer new feature for their smartwatches that would make Fitbit’s smartwatches obsolete. Or Fitbit’s smartwatches could develop glitches that would make them unpopular. The partnership with Google may not yield significant dividends or the sales of Fitbit’s fitness trackers may drop more than the company has predicted.

However, I believe that the Street is greatly underestimating the potential potency of Fitbit’s deal with Google, which can significantly improve the smartwatch maker’s R&D and marketing capabilities. Meanwhile, Fitbit has greatly enhanced its ability to attract partners in the healthcare space and its results included numerous “green shoots” and positive aspects. Trading at a price to sales ratio of just 0.72, Fitbit stock should definitely be bought at current levels.

As of this writing, Larry Ramer owned shares of Fitbit stock. 

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


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