A little more than two months ago, headed into the heart of the holiday shopping season, I cautioned investors that Fitbit (NYSE:FIT) was facing a now or never situation. If FIT stock was ever going to make sustained gains again, the company had to prove its mettle during the fourth quarter of 2018.
Little that happened the rest of that month convinced me to change my mind.
A key crux of the challenge was, and still is, Fitbit’s penchant for aiming at the tough, mid-priced sliver of the smartwatch market, and to some degree the mid-priced fitness tracker market.
Like most consumer tech, buyers want great value, or lifestyle/aspirational brands like Apple (NASDAQ:AAPL). Working in the middle of the pricing spectrum is tough.
Just a few days later, discounting, in some cases, deep discounting, of Fitbit products confirmed my suspicion.
If my viewpoint was off-base, we’ll know soon enough. Fitbit releases its quarterly numbers on Feb. 25. Just as a suggestion though, fans and owners of FIT stock may want to keep their expectations in check headed into that report.
Deep Discounting
Just as a refresher, my chief concern voiced back in December:
“… the fact that consumers are still willing to shell out a minimum of $279 for an Apple watch says the right device can still command a premium price. At the other end of the spectrum are sub-$100 smartwatches. They’re clearly no Apple device, but they’re stunningly cheap and deemed high-tech enough to satisfy the cost-conscious. That leaves Fitbit’s Versa in a difficult positions. Priced at $199 apiece, it neither carries the premium Apple name, nor is it the most affordable option for consumers that don’t care about labels.”
Those consumers, it seems, broadly agreed there’s not a great deal of demand for a mid-priced option. Less than two weeks later, the Versa’s regular retail price of $200 had been lowered to $149 by Amazon. Walmart followed suit a day later.
By Dec. 20, some retailers had knocked the price of the Versa down to $90.
Even select versions of the Apple SmartWatch saw price cuts a few days in front of Christmas. Its Series 3 device was pared back from a regular price of $309 to $259, and the smaller version of the Series 3, normally priced at $279, could be bought for $229 in mid-December.
It’s telling, though not necessarily damning. Price competition always ramps up as Christmas approaches.
Nevertheless, it’s a dynamic that bodes poorly for Fitbit, and by extension, for the value of Fitbit stock. For a few dollars more, consumers could join the much more robust Apple ecosystem of smartwatch apps. For a few bucks less, they could buy an even cheaper, sub-$100 smartwatch from Xiaomi (OTCMKTS:XIACF) that was almost as functional.
It should be noted that the price breaks were only temporary, and not necessarily realized by Fitbit for the full quarter.
Retailers generally buy inventory outright, paying wholesale prices upfront. Any discounting is ultimately absorbed by the consumer-facing seller.
If a retailer finds it’s tough to market wares at a profitable price though, direct and indirect pushback ensues. It can (and does) impact subsequent orders. It also forces the manufacturers to lower prices on goods they sell directly to consumers.
Both can ultimately lead to crimped margins, which were already shrinking for Fitbit headed into the holiday. The company’s third quarter gross margins fell from 45.2% to 40.1% following then-recent launches of the Versa smartwatch and its Charge 3 fitness tracker. It doesn’t appear the Versa held onto much pricing power when it needed it most.
And yet, even if Fitbit surprises investors, there’s still a chance Fitbit stock could be up-ended a few days later.
Watch for IDC’s Q4 Smartwatch Report
Discounting isn’t the only red flag waving as Fitbit’s earnings report nears.
Fitbit was the only major smartwatch maker to lose market share during the third quarter of last year. Samsung Electronics (OTCMKTS:SSNLF), Xiaomi and Apple all gained at Fitbit’s expense, and though the setback was minimal, it shouldn’t have taken shape at all.
The Q4 smartwatch market share update from IDC won’t likely be posted until early March, well after Fitbit posts its fourth quarter numbers. Nevertheless, it’s a report with the potential to move Fitbit stock higher or lower, depending in the interpretation of the data.
Given that traders value stocks on a relative as well as an absolute basis, it’s certainly conceivable that poor market share numbers — again — could work against FIT stock even of the post-earnings response is a bullish one.
Somehow though, an encouraging indication for the Fitbit brand from that IDC report isn’t apt to unwind a bearish response to the company’s news slated for Feb 25. Fitbit has become a “show me” story for many investors.
Bottom Line for FIT Stock
While Fitbit is a “show me” name for the time being, it has to be acknowledged the company may have finally found its niche by working with large-scale employers that offer health insurance to its workers.
It’s called the Inspire, but you won’t find it on store shelves. Rather, you’ll only get your hands on this particular fitness tracker if your employer wants you to have one, ultimately for the purpose of lowering their tab on offering health benefits.
The device is intended to identify health problems early on, and treat them before they become expensive to manage.
It’s a savvy use of the company’s tech, and its brand name.
Even so, the institutional market is even less predictable than the consumer market, with sales cycles measured in months rather than weeks. It remains unclear when, or even if, that program will make a dent in sales. It almost certainly won’t make a dent in margins, as bulk buyers tend to insist in steep price breaks.
However that effort pans out, rough results in the meantime could readily rock FIT stock, and unwind most if not all of the 40% gain claimed from December’s lows.
Tread lightly here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
