Understanding FitBit's Missteps
On February 22nd, the wearable health and fitness-tracking device maker, Fitbit ($FIT) reported EPS of $0.35 on $712 million of revenue - easily topping consensus that expected EPS of $0.25 on $648 million of revenue. However, the company's shares plunged 15% in after-hours trading after its Q1-2016 revenue guidance range of $420 million to $440 million fell short of the Street, which expected $484 million. It now trades at just 20% above its all-time low, and 72% under its all-time high.
Fitbit - Defying the odds?
The popularity of $FIT's wearable trackers is a phenomenon in-and-of-itself. At first glance, it appeared that $FIT was doomed when Apple ($AAPL) began shipping its new Watch wearable last April. After all, $AAPL has grown to dominate profit-share in nearly every hardware category that it plays in, including smartphones, tablets, computers (both laptops and desktops) and now smartwatches. The mistake that might have been made is assuming that $FIT's products would be subsumed by these more expensive smartwatches. As the category continues to mature, smartwatches are proving to be much less focused on fitness, and much more focused on everything else (email / text / social media notifications, payments, airline boarding passes, etc.).
As the smartwatch category has begun to see the end of its infancy, there have been very few surprises. Although $AAPL is not reporting unit sales of its watch, it is safe to say that it's by-far the most popular smartwatch on the planet. But, what's interesting in the growth of this category is that $FIT has remained relevant and continues to be a very popular accessory even for people that are wearing an Apple Watch. In the holiday quarter, $FIT shipped 8.2 million of its health and fitness wearables, up from 5.3 million in the year ago period (+55%). That inherently creates an interesting dynamic as the company attempts to maintain its stellar growth trajectory.
What's Maintaining Fitbit's Pace?
If you actually talk to people that wear these $FIT devices, most of them will tell you something very interesting, and something I find truly unique in this wearable 'frenzy'. They say that their $FIT bands are "motivators of activity" rather than just being "trackers of activity". Meaning, $FIT wearers will actually adjust their behavior based on the number of steps that they've accrued throughout the day. If wearers are lagging in steps, they might take the stairs instead of the elevator, or they might walk somewhere where they normally would have driven or 'hailed' a ride. The fact that $FIT devices are able to dictate behavior (as opposed to just measuring it) is something that very few wearable trackers have been able to achieve. I would argue it might be the only wearable that actually drives user behavior when it comes to physical activity. Sure, the Apple Watch may give you a tap to stand-up every 50-minutes, but I have found very few people who see it as a fitness device.
Additionally, $FIT has incorporated 'gamification' into its companion app where wearers can join groups of friends, colleagues, or the-like to compete on overall physical activity (as measured in steps). Gamification is not a new concept in wearables, the now-defunct Nike ($NKE) Fuelband and Jawbone Up all had / have some form of gamification embedded in their products. But unlike $NKE and Jawbone, $FIT has succeeded in making gamification a core part of the experience, which is also part of its unique behavior-driving appeal.
So What's the Problem?
Based on Fitbit's full-year 2016 outlook, which includes a mid-point revenue guide of $2.45B, it appears that the company is running into a similar problem as $GPRO - once you have one, there's little need to buy another as the functionality is not improving enough to warrant a replacement purchase. The decelerating revenue is dramatic, going from nearly 150% growth in 2015, to a projected 32% for 2016:
So while Fitbit might be succeeding with its low-end trackers and associated user-engagement, its revenue growth strategy is akin to restaurants - "menu expansion" (as shown in the picture below). In its 8-K filing for its FY15 results, the company said it would be incurring additional expenses as it continues the roll out of two of its new products in Q1-2016: 1) Alta - a Fitbit tracker with a more fashion-focused appearance ($129.99) and, 2) Blaze - a smartwatch with additional functionality such as a heart rate tracker and connected GPS ($199.99):
The problem that $FIT will likely run into with these new products is two-fold. With regards to Alta, the fashion appeal falls short of the critical standard of, "is this reason-enough to buy another Fitbit tracker at a $30 premium?". As for the Blaze, it is now attempting to compete with the dominant player in the space - Apple Watch, especially as $AAPL lowered the entry-level price for its Sport Watch to $299 (38mm) and $349 (42mm) on March 21st. Unfortunately for $FIT, while the Blaze may carry the novel step-tracker of its predecessors, it falls well short of the Apple Watch when it comes to overall functionality which is enabled by $AAPL's phenomenal app ecosystem - it's the very reason you see many people wearing an Apple Watch on one wrist and a $FIT band (likely the Flex) on the other.
$FIT would likely be well-served by focusing on improving the functionality by expanding the capabilities of the very product that made the company (its Flex bands). That focus would enable the company to help answer the one question that nearly every company in niche technology hardware is struggling with ($GPRO, Nest, etc.) - how can I get my user base to upgrade their devices?