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FITBIT INC FIT
August 18, 2018 - 12:47pm EST by
nondescripthandle
2018 2019
Price: 5.70 EPS 0 0
Shares Out. (in M): 250 P/E 0 0
Market Cap (in $M): 1,425 P/FCF 0 0
Net Debt (in $M): -650 EBIT 0 0
TEV (in $M): 775 TEV/EBIT 0 0

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Description

Fitbit Long Idea
 
As most already know, Fitbit makes the popular line of fitness activity trackers. After exhibiting rapid
growth and rising popularity until 2016, the company has experienced declining sales for the past two
years. This has helped validate the notion that the company’s products are just another consumer
electronics fad, and sentiment is justifiably pessimistic.
 
I believe the company’s recent success with its Versa model, its 3rd foray into smartwatches, will likely
stabilize revenues and potentially return the company to growth. This should drive a re-rating of the
stock above its current 0.5x EV/Revenue multiple, which appears overly pessimistic for a leading
consumer wearables brand operating in strategically interesting category.
 
Versa smartwatch shows early success
 
The Fitbit Versa is a smartwatch that was released in mid April of 2018. Management has indicated that
Versa in Q2 2018 has outsold Samsung, Garmin, and Fossil smartwatches combined in North America,
and that demand has outpaced supply, so they are adding additional production capacity. Versa’s initial
success can also be validated by external data. For example, since release, Versa has consistently been
ranked the top selling smartwatch on Amazon, and the 2ndbestselling smartwatch on Best Buy, behind
Apple Watch.
 
The company indicated that Versa sold in more than 1mm units in its first month of
availability. We believe at 5mm of annual Versa sales or greater, Fitbit can return to a growth trajectory.
By comparison, Apple Watch is estimated to do 20mm of annual unit sales and is growing nicely.
Currently, Versa looks like the solid #2 player in NA, behind Apple Watch, and appears to be the top
Apple Watch alternative.
 
Thus far, successful Versa sales haven’t fully offset the decline in the rest of the company’s products,
primarily activity trackers, as 1H 2018 revenues declined 16%. I believe management’s assertion that this
decline has been partially attributed to inventory de-stocking at retail throughout early 2018, and that
this activity has run its course so the company should return to flattish revenue growth or better in the
second half.
 
We believe the Versa’s success is due to the following factors:
• Cheaper than Apple Watch, Versa starts at $200 instead of $329 for the Apple Watch.
• Very light weight, slightly smaller and thinner than the Apple Watch, and is one of the lightest
smartwatches on the market. This is particularly important for female users.
• Better battery life than Apple Watch, one charge of Versa lasts multiple days.
 
Naturally the market is also skeptical of Fitbit’s ability to complete players like Apple. I think that Apple
Watch’s premium pricing and functionality will leave room for competitive entrants. Importantly, most
consumers are using smartwatches primarily for fitness and activity tracking functionality, which
perfectly aligns with Fitbit’s brand positioning.
 
Downside protection
 
• 45% of the current marketcap in cash.
• EV/Revenue of 0.5x, close to stabilizing revenues and cash flow break even.
• Company spends 350mm on annual R&D and 400mm on S&M. There has some early but limited
efforts at cost cutting so far. Company could become more defensive with its product
development and marketing approach and cut costs more aggressively.
• The category of connected devices is growing and the company’s strong brand associated with
fitness tracking aligns well with consumer interests in this category. This may be interesting to
an acquirer.
• Fitbit’s potential inroads as a medical device company would open up more attractive markets
and provide further strategic value. Please see the recent Citron write up for more detail on this
angle.
 
But is it still a fad?
 
The biggest risk to a long position here obviously remains the possibility that activity tracker demand will
be structurally challenged by a combination of declining consumer interest, commoditization due to low
priced competitors, along with competing demand from higher end smartwatches from a plethora of
competitors with more resources.
 
The core of this thesis lies on the belief that there is enough evidence of the Versa’s initial success to
both return the company to growth, as well as validating the company’s ability to compete in the
growing and evolving connected wearables category. Combined with downside protection, weak
sentiment, and a potential inflection in the business, a long position here appears timely.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

2H results show stabilization or growth. 

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