FIT - Fitbit

[glorysk87]

Really surprised that there's no existing post on Fitbit out there considering the precipitous drop it underwent the past 6 months and its entry to what some would consider value territory.  I started a position back in the $12's, and I never posted here because I guess I had assumed that there would already be a post made about it. So I guess this post is a little late, but I thought it was worthwhile regardless.

 

FIT has gotten crushed for all kinds of reasons.  Lowered guidance based on the "transition period" of bringing their new products to market, tepid responses to the new Alta and Blaze when they were announced earlier in the year, investors drawing parallels to GoPro and other "fad" gadgets, etc etc. The list goes on.

 

I started looking at the company back in February when it was trading around 11x earnings.  I thought to myself - this is a company putting up very high double digit top line growth rates and it's trading almost as if it's a commodity company at a cyclical low.  So it caught my eye.  As I continued to research I found that I was liking what I saw more and more.  No debt, huge growth rates, massive/growing addressable market, stellar user feedback, semi-network effect with the social aspect, huge lead on IP and technology developement and relatively low capex requirements.  Thought I had to be missing a piece of the puzzle, but so far I haven't found any "nail in the coffin" so to speak.

 

Admittedly, there are plenty of valid concerns.  It's an incredibly competitive market that will only get more competitive.  The barriers to entry are relatively low.  There are very well capitalized competitors.  But at 11x earnings those concerns seemed more than priced in.  Many of the other concerns I thought were completely invalid.  The "fad" argument I think is ridiculous.  Fitness wearables are here to stay as far as I can see.  The addressable market is significantly larger than something like GoPro, and they have an upgrade cycle (seriously, search facebook for Fitbit and you'll see dozens of people in the last day talking about upgrading from their old Fitbit to the new one.  The new products have been significantly more successful than the initial reactions would have led you to believe.

 

At 15x maybe the opportunity is now gone.  I ran a few different scenarios to get to a valuation on this company.  With something that's this high growth and this early stage it's obviously rife with assumptions.  But here goes.  If you assume a $15B market in 2020, and assume that FIT can capture 15% of that market (from a current market share of 30%), and I hold their margins and tax rates steady, I get to a price target of $17.80.  So we're almost there now.  But if you shift the market share up to, say, 20%, I can easily get into the mid $20's for a price target which allows for significantly more upside.

 

I would love others' feedback on this.  I've earned a very respectable return on what I saw as a pretty deep value play, but now the upside is much more uncertain. I'd love to get feedback from others who have looked at the company on what their thoughts are going forward.

[coc]

Really surprised that there's no existing post on Fitbit out there considering the precipitous drop it underwent the past 6 months and its entry to what some would consider value territory.  I started a position back in the $12's, and I never posted here because I guess I had assumed that there would already be a post made about it. So I guess this post is a little late, but I thought it was worthwhile regardless.

 

FIT has gotten crushed for all kinds of reasons.  Lowered guidance based on the "transition period" of bringing their new products to market, tepid responses to the new Alta and Blaze when they were announced earlier in the year, investors drawing parallels to GoPro and other "fad" gadgets, etc etc. The list goes on.

 

I started looking at the company back in February when it was trading around 11x earnings.  I thought to myself - this is a company putting up very high double digit top line growth rates and it's trading almost as if it's a commodity company at a cyclical low.  So it caught my eye.  As I continued to research I found that I was liking what I saw more and more.  No debt, huge growth rates, massive/growing addressable market, stellar user feedback, semi-network effect with the social aspect, huge lead on IP and technology developement and relatively low capex requirements.  Thought I had to be missing a piece of the puzzle, but so far I haven't found any "nail in the coffin" so to speak.

 

Admittedly, there are plenty of valid concerns.  It's an incredibly competitive market that will only get more competitive.  The barriers to entry are relatively low.  There are very well capitalized competitors.  But at 11x earnings those concerns seemed more than priced in.  Many of the other concerns I thought were completely invalid.  The "fad" argument I think is ridiculous.  Fitness wearables are here to stay as far as I can see.  The addressable market is significantly larger than something like GoPro, and they have an upgrade cycle (seriously, search facebook for Fitbit and you'll see dozens of people in the last day talking about upgrading from their old Fitbit to the new one.  The new products have been significantly more successful than the initial reactions would have led you to believe.

 

At 15x maybe the opportunity is now gone.  I ran a few different scenarios to get to a valuation on this company.  With something that's this high growth and this early stage it's obviously rife with assumptions.  But here goes.  If you assume a $15B market in 2020, and assume that FIT can capture 15% of that market (from a current market share of 30%), and I hold their margins and tax rates steady, I get to a price target of $17.80.  So we're almost there now.  But if you shift the market share up to, say, 20%, I can easily get into the mid $20's for a price target which allows for significantly more upside.

 

I would love others' feedback on this.  I've earned a very respectable return on what I saw as a pretty deep value play, but now the upside is much more uncertain. I'd love to get feedback from others who have looked at the company on what their thoughts are going forward.

 

I don't know FIT that well but I will add one comment: If you think the concept of an electronic fitness bracelet as a fad is "ridiculous," I truly and honestly suggest you research the history of other fads, and how people felt about them at the time. The concept of people wanting to track their fitness results or whatever may be here to stay, but whether FIT has any role to play in that, whether bracelets have any role to play in that, whether prices get destroyed or go up, whether some other broader-purpose wearable will destroy the "niche" wearable like a fitness band etc. - who knows? Can you honestly predict what the competitive pecking order will be even three years from now? Five? Forget about ten...

 

So I'd just add some caution. Consumer electronics come and go. Apple is the only one I can think of that's hung around for a meaningful period of time. The base rate here is extremely difficult.

 

[bookie71]

Why pay for the fitbit when a similar program is available on the smartphone for free?  Probably doesn't have all the bells and whistles but does everything I need, even to the nagging.

[Jurgis]

I mostly agree with coc.

 

I currently don't use fitbit or another tracking device because I actually want generation++ which would do much more and would require less overhead:

- Less overhead: I don't like wearing bracelet or something similar. Skin-breathable-patch would be acceptable though something in clothes/shoes might be even better.

- More functionality: Don't only count steps, but measure pulse, blood pressure, etc.

 

Overall, like coc says, these gadgets will continue to evolve and it's not clear if Fitbit has a moat yet. The risks are: if gadgets evolve a lot, who will capture the market with new iterations; if gadgets don't evolve a lot, they'll likely commodify and/or get subsumed by phones/watches.

[JBTC]

I am a Fitbit user and find having a tracking device hugely motivating for me to exercise more. I hated running before but now run 10km almost daily during the week. The device itself is not well made, but it doesn't matter to me.

 

Who not use a phone? Simple - a phone is too clunky to carry when you run.

 

I fully anticipate it'll be dated very soon and better devices will come along. But it's worth every penny to me.

 

[eclecticvalue]

 

Who not use a phone? Simple - a phone is too clunky to carry when you run.

 

 

You can get a arm band to hold the iphone while you run. It works for me.

[JBTC]

 

Who not use a phone? Simple - a phone is too clunky to carry when you run.

 

 

You can get a arm band to hold the iphone while you run. It works for me.

 

Sure it works. I did that before and I am sure more people are still using their phone than wearing a Fitbit.

 

So in a way Fitbit is not a big deal. It's just a little more convenient and improves your life ever so slightly.

 

Frankly after the invention of plane, car, air con, TV, and Internet, improvement in life is mostly marginal. But we still want the improvement.

 

Although You have a PC, you still get a laptop. And you get an iPad. An iPhone. A Fitbit or whatever the next gadget. We won't stop.

 

[merkhet]

I am a Fitbit user and find having a tracking device hugely motivating for me to exercise more. I hated running before but now run 10km almost daily during the week. The device itself is not well made, but it doesn't matter to me.

 

Who not use a phone? Simple - a phone is too clunky to carry when you run.

 

I fully anticipate it'll be dated very soon and better devices will come along. But it's worth every penny to me.

 

I am a hardcore Fitbit user. But I think the question from an investments perspective is whether five years from now, we'll be using Fitbits, Apple Watches, Google Balderdash (or whatever they choose to name it).

 

It's tough to know.

[glorysk87]

Thanks for the responses, all.  I understand, and to some extent, agree with most of the skepticism here.  The fact that your phone does the same thing, and that the gadget is really just a commodity when it comes down to it. Agreed. And frankly before I bought one I would have held the same mind set.

 

I don't think the value is in the physical piece of hardware.  I think the value found largely in the software/analytics behind the gadget, as well as the very well established "social network" that FitBit was a first mover on.  I will say that I bought one a little while ago, and I was absolutely shocked by how much A) I enjoyed it and B) it changed my way of thinking and behavioral patterns.  I actually bought an Apple Watch first and ended up returning it for a FitBit Blaze which I am significantly more fond of.

 

Regardless, I would really love opinions on the actual valuation framework I put forth.  I don't think FitBit needs to be the clear winner (or even a winner at all). I think that as long as they are able to capture some portion of the marketplace there is value.  Like I said originally, I'm not sure there's too much value left past $17, but that's what I'm looking for feedback on.

 

Fad or not, the market is very very large and growing very very rapidly. If FIT can capture a chunk of that, I think it's an investable company.  Again, appreciate the replies.

[glorysk87]

http://www.businesswire.com/news/home/20160428005615/en/Fitbit-Alibaba%E2%80%99s%C2%A0Tmall.com-Sign-MoU-Expand-Fitbit%E2%80%99s-Reach

[CorpRaider]

Just got one recently and am starting to be persuaded.  Also, there is a social/network effect aspect to the tracking challenges and comparisons with other Fitbit owners who are your friends.  As the data gathered/tracked gets more complex it seems there my be switching costs as well (if I lose stats on my resting heart rate over the last year or two, that sucks a big one).  Also, it is flirting with actually getting cheap on a conventional basis here...

[Evolveus]

6.5x EV/EBIT, 10.5x NTM Cashflow, 0 debt, ROE 19.6% 11.3% net margin, 13.9 PE NTM (numbers from Factset)

 

Does the company (or product) deliver a better quality of care than other providers?

I have not personally compared FITBIT side by side versus other smart watches or health wearables. What I can say is that fitbit has 85% of market share (according to CEO) and very recognizable brand.  FIT focuses on the lower end of the market from a price point perspective making it more accessible to the masses as opposed to Apple Watch. Apple watch can do so many things and is not immediately synonymous with 'health and fitness' unlike the targeted niche fitbit brand.

 

Does the company (or product) provide a net savings to the health care system?

The above question is something that Fitbit is striving for.  Many of their corporate clients use Fitbit as a way of incentivizing exercise among their employees. The health benefits of exercise is not debatable, and healthier employees mean lower health care costs for employers and insurers. So yes, in that regard, Fitbit can potentially provide a net savings to the system.

 

The current devices are relatively simple when compared to other more feature rich smart watches. As new competition enters, margins and ROE could regress a bit. However, the potential addressable market should continue grow nicely. Right now int'l revs are a tiny piece of revenue, but the yoy numbers are nice in that space.  On the CC, FIT said they are making a concerted effort to expand in Euro and China. On the call they also mentioned that their latest releases have done very well even while being released mid-to-late in the quarter, so a full Q of new product revs is not showing up yet. 

 

One of my favorite elements of the fitbit story is the data that they collect. This simple data is loaded into their interface and arranged in a useable and actionable way for fitbit users. If one were to work hard for 6 months pumping data into the fitbit database and then suddenly lose their fitbit, what incentive would there be to go by a different brand device and have to start re-building your personal data set from scratch. I think that self generated data ecosystem will spur many repeat users and upgraders moving forward. I think there is a reasonable case for network effects here based on the personal data that people accumulate thru the device and the related GUIs (mobile & desktop)

 

Anecdotal:  For example I heard the BBerg news host say "I went for a jog this morning, but I forgot my Fitbit, so it's like it doesn't count."

[blainehodder]

Bought some at the end of the day today.  This is one of the cheapest stocks out there from an EBIT yield perspective. Especially convincing given the impressive revenue growth, and return on tangible assets.  While the market is clearly already competitive, and will likely become more so, the market itself is growing rapidly, and fitbit is likely set to continue growing rapidly for a 3-5 yrs in my opinion.

 

Classic magicformula stock. They are ugly, and on average they work, even if it is tough to predict the future for individual names like this.

[CorpRaider]

Yeah after having one for a month there is no question in my mind that wearables are the future.  Are these guys going to capture a large part of that?  I don't know.  But it seems like you aren't paying a whole heck of a lot for the chance.

[glorysk87]

I'm glad some of you guys are seeing what I saw in this name.  Here are my thoughts post-earnings:

 

The growth rate in product sales goes a long way in diminishing two significant negative arguments that I commonly hear regarding Fitbit.  First, it supports the fact that there is significant consumer demand for dedicated fitness wearables which I think diminishes the argument that Fitbits are a fad.  Second, 40% of the Blaze/Alta activations were by prior Fitbit users - I think this is an underappreciated metric and seriously undermines the argument that there is no upgrade or replacement cycle for the product.  I think that this lends some serious support to my thesis that as the devices are upgraded and in the future contain additional functionality and sensors, users will not hesitate to upgrade their old devices.

 

I think this quarter is especially noteworthy as it is the first time the company has sold an "upgrade" model of a device.  The strength of the upgrades has obviously given the management team some serious confidence in their competitive position.  Enough so for them to forge full steam ahead with expending a significant amount of money to improve their products and acquire customers, which should widen their competitive moat quite a bit.  In addition, the partnership with Tmall in China should give international expansion a shot in the arm.

 

I'm a bit puzzled as to why the market sold the name off en masse today.  The implications of both the financial results as well as the CC commentary were overwhelmingly positive.  I have a hard time believing that the market is unintelligent and/or short-sighted enough to assume that the near-term margin compression due to investment in the company is going to be detrimental to the company in the long term.  I continue to be surprised by the market.

 

I would welcome additional comments or feedback - especially if anyone had a negative reaction to the quarterly earnings I'd love to hear the rationale.

 

My opinion: I think the management team is taking exactly the steps they need to take to create long-term value. I continue to believe that there is asymmetric risk/reward here to the upside.

[blainehodder]

Getting punished today presumably on Apple's WWDC conf? Regardless, still seems cheap given the growth, unit economics and the EBIT yield. Not exactly a high moat Buffett play, but it does have large upside potential at these levels in my opinion.

[glorysk87]

I'm not sure it's the WWDC effect. Otherwise we would have seen this action yesterday.  Plus I didn't see anything in yesterday's WWDC that appeared even remotely threatening to FIT. In fact, I came away feeling even better about FIT's competitive position.

 

But if anyone has seen any news (aside from WWDC) that could explain the price action today I'd love to hear it.

[fareastwarriors]

Is there a special share class? Pure speculation but FIT is an easy bite size for Apple.

[Guest roark33]

I'm not sure it's the WWDC effect. Otherwise we would have seen this action yesterday.  Plus I didn't see anything in yesterday's WWDC that appeared even remotely threatening to FIT. In fact, I came away feeling even better about FIT's competitive position.

 

But if anyone has seen any news (aside from WWDC) that could explain the price action today I'd love to hear it.

 

The social and competitive features introduced inside the apple watch make it much more competitive with fitbit.  I would put the odds around 1%, no, probably less, that Apple would ever acquire Fitbit. 

[blainehodder]

I'm not sure it's the WWDC effect. Otherwise we would have seen this action yesterday.  Plus I didn't see anything in yesterday's WWDC that appeared even remotely threatening to FIT. In fact, I came away feeling even better about FIT's competitive position.

 

But if anyone has seen any news (aside from WWDC) that could explain the price action today I'd love to hear it.

 

The social and competitive features introduced inside the apple watch make it much more competitive with fitbit.  I would put the odds around 1%, no, probably less, that Apple would ever acquire Fitbit.

 

Agree an Apple acquisition is extremely unlikely.

 

As for the iwatch, I'm much more worried about competition from Garmin and Xiaomi putting pressure on margins, market share and the social network effect.

[glorysk87]

Pretty solid release from FIT.  5.7mm units sold, far and above the leader in terms of volume, and the first quarter we've seen where unit growth has actually reaccelerated on a YoY basis.  Xiaomi and Apple are the only competitors who have even come close in terms of volumes, and neither are really direct competitors in my view (Apple occupies the higher tier and Xiaomi occupies the lower tier).  Revenue and EBITDA were strong, though R&D spending continues at an elevated level.  I think this quarter should bring comfort to a lot of skeptics out there.  The addressable market (smartphone users is the proxy) is only 15% penetrated in the US, with much much lower penetration rates in the rest of the world.  I think in order to remain bearish on the name, you need to really believe that growth will sharply turn negative, which I simply don't see happening.  New products are scheduled for release in the 2nd half of the year which should provide another boost to demand.

[glorysk87]

VIC post on FIT from July (unfortunately I'm not a member so I'm on the 45-day delay):  https://www.valueinvestorsclub.com/idea/FITBIT_INC/138694#description

 

Nothing groundbreaking there, but worth posting I thought.

[nostradamus]

I started looking at fitbit recently, including reading this thread. Seems like a good risk/reward trade-off at current prices and so I bought in today.

 

I agree with the comments about the network effects. I know a few people who have had fitbits in the past and upgraded to new models in part to keep the same platform/data. I think there is a stickiness. I also really like their core focus on health/fitness, which seems like a growth market for a long time, more and more driven by employers/insurers. More anecdotal evidence, but I have friends who have received fitbits from their employers  as a way of encouraging both fitness and team bonding. Also, I was amazed to hear my 70 year old father express an interest in getting one. The elderly market seems like it could be quite a growth area.

 

Anyway, I have mixed feelings about their apparent recent moves towards developing (presumably less health/fitness oriented) smart watches. See link below.

 

https://www.wareable.com/fitbit/fitbit-buys-vector-smartwatch-startup-3761

 

Any views on this? Does it signal their pessimism about their core health/fitness market and a desperate attempt to diversify? Or is it confidence that what they can replicate their success in the smart watch sector?

 

N.

 

 

 

 

 

[JayGatsby]

Have they said anything publicly on how they intend to use their cash? The transcript I was looking at said post January inventory swing they expect to have $900M+ of cash, but they didn't seem to say what they intended to do with that. Seems like companies in their stage of the lifecycle are more likely to spend that acquiring companies, which they now seem to be doing (https://techcrunch.com/2017/01/10/vector-smart-watch-startup-acquired-by-fitbit-as-wearable-giant-expands-its-team/).

 

Some indications are that this holiday season was weaker than expected: http://www.fool.com/investing/2017/01/12/more-evidence-that-fitbit-inc-may-have-an-inventor.aspx

 

Worry seems to be that they follow the exact path of GoPro.

1. Strong product name, sales, margin

2. Invest in SG&A & R&D to deliver nextgen product

3. Sales of core product fall while costs remain high

4. Company makes acquisitions into related but different markets at high prices

5. Nextgen product either isn't delivered or the market doesn't appreciate it

6. Cash is gone and product is now unprofitable

 

One offset is fitbit is currently doing over $1B of gross margin a year, with a market cap of $1.7B. Even if somehow they burned the whole $900M of cash and sales declined, that would still be worth something to an acquirer. Interest in their products still seems to be strong: https://www.google.com/trends/explore?q=fitbit

 

 

[glorysk87]

For what it's worth, I exited my FIT position after Apple and Nike announced their partnership on the Apple Watch in September. The share price has declined quite a bit but I no longer have faith in the company's ability to withstand the competitive pressures of the space.