On Friday, Google parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) announced a buyout of fitness tracker Fitbit (NASDAQ:FIT). The news sent Fitbit stock soaring 15.5%. GOOGL stock traded higher by 1% on a strong day for the market.
Neither the deal’s $2.1 billion price tag nor Fitbit’s $313 million in revenue will make an immediate impact for GOOGL stock. After all, Alphabet is coming off a quarter where it reported $405 billion in revenue and $7 billion in net income. Fitbit’s numbers will just be a drop in the bucket for Google out of the gate.
But Google will get much more from Fitbit over time than just revenue. In fact, Fitbit may end up being more valuable for GOOGL stock than investors realize.
A Path Forward for Fitbit
First of all, FIT stock investors should be thrilled with the buyout. Alphabet may have just saved Fitbit and their investment. Sure, the $7.35 per-share buyout price is well below Fitbit’s initial public offering price of $20 back in 2015. But FIT stock has traded as low as $2.81 in recent months.
The reason for the weakness in FIT stock in recent years is because business has struggled. Revenue is down 28% in the past three years. FIT reported a $68 million net income loss last quarter, a profit margin of -21.8%.
The reason Fitbit has struggled is a rise in competition, primarily from Apple (NASDAQ:AAPL). The feature-rich Apple Watch particularly appeals to iPhone users due to its seamless integration with the device. Apple has been eating into Fitbit market share for years, leaving the company potentially destined for bankruptcy.
Why Would Google Buy a Doomed Company?
On its own, Fitbit’s business model and lack of resources to compete with Apple may not have been a winning recipe. But a company the size of Google doesn’t necessarily care about Fitbit device sales growth or profits.
Google has a history of buying companies that have questionable stand-alone trajectories. Alphabet bought Motorola for $12.5 billion in 2011. It paid $3.2 billion for Nest in 2014. It also acquired HTC’s design team in 2017 for $1.1 billion.
Fitbit has about 27 million active users. Google’s market-leading advertising business will now have direct access to those users.
Google will likely also begin integrating Fitbit devices with its other devices, including Pixel phones and Google Home. As of now, device sales represent a small portion of Google’s total sales. But analysts say wearables are a potentially major growth category in coming years.
“The hardware opportunity for Google is better reach for Google’s software and ad products, without usage & functionality limitations or revenue sharing with other device makers (Google is likely frustrated with [total acquisition cost] requirements for Apple devices, in our view),” Bank of America analyst Justin Post says.
Perhaps most importantly, Google will get access to Fitbit user data. Healthcare is another major long-term growth market. Tech companies like Apple and Google are looking to get their share of the pie.
How to Play GOOGL Stock
In a nutshell, the biggest takeaway from the Fitbit deal for Google stock investors is that Fitbit puts Google in a better position to take on Apple.
“The deal to buy Fitbit should give Google a much bigger presence in wearables, a significant amount of user data in the health & fitness category, and a better foundation to better compete against Apple,” Post says.
Bank of America has a “buy” rating and $1,450 price target for GOOGL stock.
But even before the Fitbit deal, Google stock was a compelling long-term investment. Despite its massive size, Alphabet is still growing revenue at a 20% clip. It has major exposure to some of the highest-growth fields in tech, including internet and mobile search, online advertising, artificial intelligence, cloud services, machine learning and autonomous vehicles.
At the same time, GOOGL stock is trading at just 23.8 times consensus forward earnings estimates. I’ve said before that GOOGL stock is like a cheaper version of Amazon (NASDAQ:AMZN). Last quarter, Amazon reported 23.6% revenue growth, yet its stock trades at 65.8 times forward earnings.
While antitrust concerns create uncertainty for Google stock, a potential breakup could even help unlock value for investors.
With the S&P 500 near all-time highs, I wouldn’t argue with the idea that now is not the best time to be buying GOOGL stock. But I believe given its high-growth outlook and its relatively modest valuation, GOOGL stock should be at the top of investors’ list of stocks to scoop up during the next downturn.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
