Consumers’ growing preference for smartwatches over fitness trackers has pummeled Fitbit (NYSE:FIT) since Apple (NASDAQ:AAPL) released the Apple watch in 2015. But the company may have turned a corner. After reporting Q2 2018 results — where smartwatch revenue outpaced tracker sales for the first time and a return to profitability is in sight — Fitbit stock was up in after-market trading. But FIT has fallen this morning to 7% below pre-earnings levels.
Fitbit Reports Q2 Earnings, Beats Expectations
Fitbit reported its Q2 earnings, and while the company is still in the red, it managed to beat guidance and analyst expectations. Revenue was $299.3 million (down from $353.3 million in Q2 2017) and net loss-per-share was 22 cents. These numbers beat analyst expectations of $285.4 million in revenue and 24 cents loss-per-share.
The company also said that it is expecting to break even in the third quarter, with a “return to growth and profitability” in the second half.
The numbers were enough to result in an uptick in Fitbit stock in aftermarket trading. FIT was up as much as 7% at one point before falling.
Smartwatch Sales Driving Turnaround
Although it struggled with its first attempt at a smartwatch (the Ionic), Fitbit appears to have hit the target with the Versa. In its earnings call, the company pointed out the Versa smartwatch was its fastest selling product ever, and that it is opening an additional production line to meet the demand.
Smartwatch revenue surpassed tracker revenue for the first time ever, accounting for 55% of revenue. The changing product mix also boosted the average sale price (ASP) of a Fitbit product 6% year-over-year to $106. The Apple Watch remains the one to beat, but Fitbit reported the strong performance of its Versa smartwatch is having an impact on other key smartwatch competitors, including Garmin (NASDAQ:GRMN). Fitbit CEO James Park noted:
“Demand for Versa, our first ‘mass-appeal’ smartwatch, is very strong. Within the second quarter, Versa outsold Samsung, Garmin and Fossil smartwatches combined in North America, improving our position with retailers, solidifying shelf space for the Fitbit brand and providing a halo effect to our other product offerings.”
Double Digit Healthcare Growth
Fitbit also noted its growing presence in the healthcare channel. This is an area that has big growth potential and Fitbit has some advantages over Apple, including a more affordable smartwatch with much longer battery life and wider smartphone compatibility, and the availability of less expensive fitness trackers in addition to that smartwatch.
Fitbit says with its current product mix and the health apps available on its smartwatches, it now has the ability to provide solutions for over 100 U.S.-based health plans.
Is This a Turning Point for Fitbit?
Fitbit has seen its fortunes turned upside down since 2015 and the release of the Apple Watch. That marked a point where the smartwatch began to displace fitness trackers as the wearable of choice. At the same time, Chinese companies — notably Xiaomi — ate way at Fitbit’s market share with dirt cheap fitness trackers. As a result, Fitbit stock slid from highs near $47 to single digits by the fall of 2016. And for the past year, FIT has been on a roller coaster between $5 and just over $7, but has never been able to regain momentum.
Strong Versa performance, continued demand for the Fitbit smartwatch and a projected return to profitability may be enough to mark Q2 2018 as a turning point for the company and for Fitbit stock.
The key to whether this is another blip or the start of an actual trend is likely to be this holiday quarter. The Versa will be available in greater quantities for holiday shoppers, but it will probably be going up against a new Apple Watch, expected this fall. What Apple comes up with could make or break this Fitbit recovery.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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