How Much Of A Threat Is Competition To Fitbit Inc (NYSE:FIT)?
by Neha Gupta · August 20, 2015
It has come as a disappointment to investors in Fitbit Inc (NYSE:FIT) that the company is facing growing competition in its industry. As the incumbent, Fitbit has become the target of newcomers in the health and fitness business as they work to steal market share.
Fitbit is already fighting back, but can it win the war, considering that deep-pocket rivals like Apple Inc. (NASDAQ:AAPL) are among those threatening its business?
In some ways, there is justification to be worried about the future of Fitbit, given the rising competition in the fitness tracker market. However, it is also important to note that growing competition is actually helping Fitbit as the company has been able to take advantage of the same for its own benefit.
Positive impacts of industry competition
The market is growing:
It is estimated that about 45.7 million wearables, including health and fitness trackers, will be shipped this year, and the number is predicted to rise to 126.1 million by 2019. Just about 21 million wearables where shipped last year.
Corporate wellness programs are actually becoming an important part of the health and fitness tracker industry. Estimates point to the corporate wellness budget rising to $11.3 billion by 2019, almost double $7.4 billion in 2014.
As more players enter the fitness tracker business, the market is growing fast because of increased awareness. In that satiation, incumbents like Fitbit can take advantage of their large market share, and brand reputation, to make more sales, and the company is already doing that.
ASP is improving:
The other advantage that is coming from more players getting into the fitness tracker business is that the average selling price (ASP) of such devices is improving. The entry of Apple into the health tracker space has actually helped to both raise awareness about wearable wellness devices and boost ASP at the same time.
A new report on the wearable market, which covers progress in the first half of 2015, noted that wearable ASP has improved since Apple entered the scene. Fitbit reported that its ASP rose 23% in the latest quarter (the second quarter of 2015) compared to the same period last year.
Taking on competition
While Fitbit Inc (NYSE:FIT) is currently benefiting from competition in its industry, the company understands that the situation cannot remain the same forever. A time will come when competition pressure will build up, hurting sales and profitability at the same time. For that reason, the company has been making efforts, first to defend its market share, and second to expand it.
New product launches:
Fitbit generates most of its revenue from hit products, and the company is looking at more frequent new products release as part of efforts to bring more hits to market. With successful fitness products, Fitbit is able to keep existing customers glued and get new ones coming.
In addition to focusing on new product development, Fitbit is also trying to squeeze more revenue by targeting its existing customers with add-on solutions.
Fitbit is increasing its focus on software and services, acquiring FitStar to bolster its competitive edge on that front, a move that should lead to more incremental revenue from selling extra products.
The company has also come up with a social network, a platform that it has not fully commercialized, but with the potential to enable it to generate incremental revenue in the future. Additionally, with comprehensive wellness offerings that include health data profiling and social networking, Fitbit is able to maintain a loyal customer base that is easy to upsell.
Fitbit may be facing more competition on the fitness tracker hardware front, but competitors will certainly have a very difficult time catching up with it on the software front. Fitbit boasts that more than 70% of its engineers are software experts, which perhaps explains why the company has the highest rated tracker apps on the App Store and Google Play.
Fitbit is expanding outside the U.S., with sales from abroad rising 250% year-over-year. The highest international gains were recorded in Europe and Asia where revenues rose 300% year-over-year in each case.
With international sales accounting for just about 21.9% of the total in the second quarter, there is huge growth potential for Fitbit in the international market and the move abroad also enables the company to offset revenue pressure at home.
Moreover, Fitbit still enjoys strong market share in the U.S., leading rivals with 34.2% share of the market as of the end of the first quarter. In the connected fitness tracker space, Fitbit controlled 85% of the U.S. market in the first quarter.
Fitbit Inc (NYSE:FIT) is not only sure about what it needs to do to stay competitive, but the company’s efforts are already paying off.
Fitbit reported selling 4.5 million wearables in the latest quarter (second quarter 2015), up from 1.72 million sold in the same quarter a year earlier. The company also enjoyed strong gross profit margins of 47% in the quarter.
The strong unit sales in the second quarter led to revenue more than tripling from the previous year, to $400 million, at a time when Wall Street was looking for revenue of $319 million. Adjusted EPS rose to $0.21, beating the consensus estimate of $0.08. The revenue gain in the second quarter was also helped by improvement in ASP.
During the first half, Fitbit sold more wearable units than Apple, accounting for 35% of the industry total compared to Apple’s 11%. Part of the reason Fitbit is doing better than Apple in unit sales is that its devices are more affordable. As such, as long as consumers buy more of Fitbit’s wearables, the company is expanding its opportunity to tap incremental revenue by selling add-on products and services to its burgeoning user population.
Looking ahead, Fitbit has modeled current quarter revenue in the band of $335-$365 million and adjusted EPS in the range of $0.07-$0.10. The management predict gross margins to be in the vicinity of 47-48%.
Potential threats for Fitbit
Reliance on hit products: For the most part, Fitbit generates the vast majority of its revenue from new products that turn out to be a hit in the market. This situation puts pressure on the company and also heightens its risks, because failure to come up with a hit product can lead to lower sales and a drop in stock price.
Connected devices: Fitbit is implementing Internet connection capabilities in its various products, whereby it is also collecting data to enhance the user experience. The challenge is that any data breach on the company’s system or a third-party company that handles its data can result in costly lawsuits and damage to the company’s reputation.
Competition is getting intense in the wearable tracker market and Fitbit Inc (NYSE:FIT) is the main target. However, there is no cause for alarm. The company is already dealing properly with the competition threat, and the progress is inspiring.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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