Fitbit (FIT), the maker of a highly popular line of fitness trackers, got off to a roaring start with its IPO back in mid-June. The stock soared by 48% on its first day of trading after the company boosted the number of shares issued and the price range.
But since then, things have cooled down as the equities markets have gotten much more volatile. Fitbit stock is off about 35% from its high.
Despite this, the company continues to grow at a torrid pace. In the latest quarter, revenues spiked by 253% to $400 million and the adjusted EBITDA came to $86.2 million. For the period, FIT sold about 4.5 million devices, up from 1.72 million in the same period a year ago.
So, should you look at Fitbit stock as an opportunity, or could FIT’s cooling continue? To see, we’ll look at the pros and cons of Fitbit stock.
Fitbit Stock Pros
Dominant Player in the Wearables Market: Since launching in 2007, FIT has sold over 25.3 million devices — impressive, considering Fitbit offers just six of them, in prices ranging from $59.95 to $249.95. According to NPD Group, the company has 85% of the share of the U.S. market. The company leverages technologies like online dashboards, mobile apps, sensors, GPS, data analytics and social tools to help customers lose weight and get better sleep. Fitbit also has been aggressive with its marketing and distribution. To this end, FIT has partnerships with Tory Burch and Kellogg (K), and also sells its devices in more than 45,000 retail stores, such as Best Buy (BBY).
Enormous Market Opportunity: According to International Data Corporation, the wearables market is the fastest among the global consumer electronics market. In 2014, shipments came to 19.6 million and they are forecast to hit 126.1 million by 2019, for about $27.9 billion in revenues. Some of the drivers include changes in lifestyles and the wide-scale adoption of smartphones. But some employers are also looking at the wearables market as a way to help reduce rising healthcare costs. So far, this is a small category for FIT, but there is plenty of potential. In the latest quarter, the company struck corporate wellness agreements with Geico, Sutter Health, TransUnion (TRU) and Quicken Loans.
Powerful Ecosystem: FIT has an open system based on application program interfaces that allow third parties to develop apps for the platform. The result is a rich diversity of functions for the devices. Consider that the FitBit platform averages over 50 million API requests every day to third-party APIs. FIT also has focused on seamless compatibility with more than 150 mobile devices and operating systems, such as iOS from Apple (AAPL), Android from Google (GOOG, GOOGL) and Windows phones from Microsoft (MSFT).
Fitbit Stock Cons
Valuation: Even with the drop in Fitbit stock, the valuation is far from cheap. FIT shares trade at 35 times next year’s earnings estimates. Compare that to GoPro (GPRO), which has a multiple of 20, and Apple, which trades at a mere 11 times estimates. True, Apple may be a fairly mature — but then again, the company is still growing at a hefty rate. But at its lofty valuation, Fitbit stock could be vulnerable to even a small deceleration in growth.
Usage: Is a fitness device really a niche product? It could be. And some evidence of this actually comes from Fitbit’s S-1. After all, among 20.8 million devices sold, there were only 9.5 million active users. That sounds like significant churn, but don’t be surprised — health-oriented products often generate a lot of initial enthusiasm, but that can be difficult to maintain.
Competition: FIT must fight against tough competitors like Garmin (GRMN) and Samsung (SSNLF), but the biggest threat is likely to be Apple. With its amazing brand, cutting-edge technology and substantial marketing savvy, there is likely to be pressure from the recently launched Apple Watch. So far, it is tough to gauge the traction. Yet a recent survey from IDC indicates that Apple is now the No. 2 operator in the wearables space, with about 3.6 million units shipped in the second quarter. Granted, the Apple Watch seems to be fairly basic in terms of its functionality, but this is likely to change over time as AAPL continues to invest in the product.
When it comes to the wearables market, FIT has a tremendous brand. It is the defining company in the space. And even though AAPL will likely take share away, the fact is that its devices will be more broad-based.
As for the health category, FIT is likely to remain a top player. This focus also should allow the company to take advantage of major trends, such as the growing corporate wellness market.
In the near term, there should be a nice catalyst from the upcoming Christmas season. And sooner than later, expect FIT to come out with new offerings, which could gin up excitement and sales.
So, should you buy Fitbit stock? Yes — even though the valuation is still pricey, the company is likely to remain in a high-growth phase.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.