Why Wearables Data Is Great News For Fitbit Inc (NYSE:FIT) Stock Owners

- December 22, 2016

fitbit-stockLast week BNL Finance went on the record saying that Fitbit Inc (NYSE:FIT) prospects for 2017 are surprisingly bullish. I say “surprisingly” because FIT stock is the last security I expected to gain 7 points in the BNL Numeric Research Scale. However, when you start to look at what drives stock prices, like sentiment, valuation, and performance relative to expectations, it is true that Fitbit stock “could” have a breakout year.

BNL Finance identified 3 catalysts as a cause to be bullish into 2017

First, FIT stock is oversold and deeply undervalued relative to fundamentals. It is priced for a worst case scenario, which is why a decent 2017 could actually propel Fitbit stock much higher in 2017.

Second, Fitbit EPS expectations for 2017 are sinking. Fitbit’s EPS outlook for 2017 has gone from $1.43 to $0.65/share over the last 90 days according to 20 polled analysts. This makes beating expectations easier for Fitbit.

Third, Fitbit has only launched one smart-watch, and not one since Q1. The Fitbit Blaze has been the company’s best selling device, but the company’s current performance is fueled by an old product line. The catalyst is that Fitbit launches new successful smartwearbles in 2017.

In other words, a lot of things have to go right for FIT stock to rally in 2017.

FIT stock: A new reason to be bullish

Here is a very telling chart from IDC. What’s remarkable is that despite having a dated product line and no new smart wearables, FIT actually gained market share in the worldwide wearables market during Q3. Over the last six months, despite losses in Fitbit stock, it has become apparent that success in the wearables market and Fitbit go hand-in-hand.

One could make a strong argument that 90% of FIT stock’s loss is tied to speculation and fear that its business will not stand the test of time against the likes of Apple and Samsung. However, when you see the deceleration of growth in the wearables market, and more importantly in the smart wearables space without FIT launching new products, you realize Fitbit controls the market.

Top Five Wearable Device Vendors, Worldwide Shipments, Market Share and Year-Over-Year Growth, 3Q 2016 (Units in Millions)
Vendor 3Q16 Unit Shipments 3Q16 Market Share 3Q15 Unit Shipments 3Q15 Market Share Year-Over-Year Growth
1. Fitbit 5.3 23.0% 4.8 21.4% 11.0%
2. Xiaomi 3.8 16.5% 3.7 16.4% 4.0%
3. Garmin 1.3 5.7% 1.2 5.3% 12.2%
4. Apple 1.1 4.9% 3.9 17.5% -71.0%
5. Samsung 1.0 4.5% 0.5 2.4% 89.9%
Others 10.4 45.3% 8.3 37.0% 26.1%
Total 23.0 100.0% 22.3 100.0% 3.1%
Source: IDC Worldwide Quarterly Wearable Device Tracker, December 5, 2016

In this report, IDC noted overall growth of just 3.1% and just recently reduced its full-year growth outlook from 60% to 24.7% in 2016. Ironically, its not basic wearables that are causing this massive reduction in growth. Instead, it is the fact that smart wearables are not living up to expectations.

There are two key takeaways from this report:

  1. Fitbit is single handily driving this industry despite an aging product line. Regardless of what Wall Street thinks, consumers love their FIT. Proof lies in both its growth and the fact that basic wearables have outperformed expectations.
  2. Expectations for smart wearables were at their highest right after the Fitbit Blaze launch. Fitbit’s lack of innovation or new smart products is having a direct effect on the industry.

That said, Fitbit just acquired Pebble intellectual property such as its operating system, watch apps, and cloud services. The company has also partnered with Medtronic to integrate health and activity tracking for patients living with diabetes and their physicians. We believe these are meaningful developments for Fitbit.

Solving Fitbit stock’s big problem

Not only is the company near its next smart-watch product launch (likely Q1 2017) but the partnership is reason to be bullish on Fitbit’s product roadmap and digital health prospects. Regardless, we believe that if Fitbit decides to launch a new smart wearable in 2017, presumably the first quarter, it will become more apparent than ever just how much the company drives this industry forward.

In the past, Wall Street analysts and investors saw Fitbit’s business at risk due to rising competition among large technology companies. Next year, that theory could be put to rest. And if so, we believe the implications for FIT stock will be significant. The reason is that analysts and investors will take its success much more seriously the second time around, driving Fitbit stock higher and significantly increasing its M&A appeal for companies that want to succeed in wearables (i.e. Apple).

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