Apple (NASDAQ:AAPL) has proven that smartwatches can be big business, and the Apple Watch has dominated the category since its release in 2015. Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google, on the other hand, has failed to have a meaningful impact in the market, despite the release of Android-based Wear OS. However, the company made a huge move to kick off November, with the announcement that it is spending $2.1 billion to acquire smartwatch and fitness tracker maker Fitbit (NASDAQ:FIT). Market reaction so far has been positive, with Google stock up 2.4% since the news first hit early on Friday.
The big question is, can the company parlay this acquisition into meaningful smartwatch marketshare — and revenue that could actually move the needle for GOOGL stock?
Google to Acquire Fitbit
On Nov. 1, Google announced it would be acquiring Fitbit for $2.1 billion, with the deal expected to close in 2020. In a post announcing the acquisition, Google noted:
“By working closely with Fitbit’s team of experts, and bringing together the best AI, software and hardware, we can help spur innovation in wearables and build products to benefit even more people around the world.”
Google stock has been trending up since that announcement was made.
The irony here is that three years ago, Fitbit was in the same position as Google is now.
Unable to field a smartwatch that could compete with the Apple Watch, Fitbit bought its way into contention by acquiring smartwatch pioneer Pebble. That acquisition was a bargain $40 million — a far cry from the $2.1 billion Google is paying, but it paid off for Fitbit.
The company leveraged Pebble’s IP to develop smartwatches like the Versa that have been far more successful than its original Blaze attempt was. Over the past several years the company has been trading second- and third-place positions in the smartwatch market with Samsung.
That hasn’t been good enough to keep Fitbit viable, though, making it a ripe acquisition target for Google. Since Fitbit’s 2015 IPO, its stock has lost 78% of its value. In comparison, GOOGL stock is up 131%.
What’s Google Getting With Fitbit?
With its purchase of Fitbit, Google goes from a smartwatch “Other” with Wear OS, to leaping into second or third place in the industry. Suddenly, it’s an actual contender in a global smartwatch market that’s projected to be worth $31 billion by 2025. Apple is going to be feeling the heat with the resources of Google now combined with Fitbit’s smartwatch IP and marketshare.
Perhaps even more important than the Fitbit IP is its users, and their data. And that is something Google will have to handle very carefully.
While Google stock got a pop on the news of the acquisition — showing investors and the market like the move — not everyone was happy. Writing in Forbes, Bruce Y. Lee, (Professor of Health Policy and Management at the City University of New York and Associate Professor at the Johns Hopkins Carey Business School) brought up privacy concerns over the vast amount of personal health data Google will be gaining access to for the 28 million Fitbit users.
“Fitbit could grow its customer base in part through consumer trust that its data was not being used and sold for advertising and other purposes.”
There is concern that Google may not be so hands-off with that data. The company could use it for purposes like targeted advertising — not a stretch given that Alphabet’s bottom line remains dominated by ad revenue.
Bottom Line for Google Stock
One way or another — through the potential for meaningful smartwatch sales, and/or the potential for monetization of user data — Google stands to come out a winner on the Fitbit deal. How much could this acquisition move the needle on Google stock?
The devil is going to be in the details.
Will Google run Fitbit independently, or try to fold its IP into Wear OS? Will Google finally stop relying on third-party vendors and release its own Pixel smartwatch based on Fitbit technology? Will Google leverage Fitbit’s relationship with insurers and healthcare providers? Will Google target ads based on Fitbit wearers’ health and fitness data?
What Google is planning around Fitbit should become more clear next year, but, in the meantime, it is safe to say the acquisition was a good bet with a high likelihood of a payoff for GOOG stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.