Under Armour Inc (NYSE:UA) (NYSE:UAA) is a complete thorn in the side of Nike Inc (NYSE:NKE). There’s not much that causes Under Armour problems. However, its connected fitness unit has not lived up to the hype. The Baltimore Sun just reported that Under Armour is laying off two dozen employees in that unit, an action that does not happen for small units with robust growth.
Given this latest news, Fitbit Inc (NYSE:FIT) would be the perfect buyout for Under Armour Inc (NYSE:UA) (NYSE:UAA). As seen in the below chart from BNLMarketAnalytics.com, Under Armour has clearly been lagging in the accessories arena. Not only is it a near irrelevant business for Under Armour, but growth has fallen significantly. An acquisition of Fitbit would instantly give Under Armour three big segments, thereby creating diversification and accelerated growth.
Say what you want about Fitbit, but CEO James Park has a better handle on the wearables market than anyone else. Even despite smart wearable product competition from the likes of Apple, Samsung, and Alphabet, Fitbit has consistently maintained its market share lead despite having just one smart wearable. Fitbit has built its dominance with mostly basic wearables.
Yes, Fitbit revenue will decline 27% to $1.6 billion this year. However, that’s a big jump from the $270 million it created in 2013. Fact is Fitbit Inc (NYSE:FIT) could very well be having a breather year, one where it regroups, refocuses, and then breaks out. Keep in mind, Fitbit has not had a meaningful smart wearables product launch since Q1 of last year. If I were Under Armour management, this fact would be very attractive.
Under Armour’s Kevin Plank should be smart enough to look past Wall Street and FIT stock price, and realize that Fitbit has incredibly strong brand power with consumers. If Under Armour (NYSE:UA) (NYSE:UAA) acquired Fitbit Inc (NYSE:FIT), it would be purchasing a company at rock bottom with a market capitalization of just $750 million minus cash. Even with a 100% premium, Under Armour would acquire Fitbit at a very low multiple.
Furthermore, Under Armour would acquire Fitbit ahead of several new smart wearable product launches. Fitbit acquired Pebble assets and its network of 14,000 third-party applications, and vowed to a “different approach” vs competing smartwatch makers. With partnerships like Habit for food recommendations and nutrition plans; Peloton for metric sharing; and VirZOOM for VR, it is clear that Fitbit Inc (NYSE:FIT) is going in an entirely new direction, and investors must not discount its history as a market leader.
With that said, we have insisted for the last year that FIT stock problem is not Fitbit’s revenue or growth, but rather its lack of a recurring revenue stream. For a technology companies, investors want to see recurring revenue streams. However, the apparel market is different.
The value of Fitbit would most likely appreciate significantly when rolled in to Under Armour’s business. And the new revenue would do wonders for UA stock.
Beyond the added diversification and gaining a proven leader in wearables, Under Armour could acquire Fitbit for roughly $2 billion minus cash. That is 24% of its current market capitalization. However, if full year sales expectations are met, Fitbit would cause a near 40% increase in Under Armour’s total revenue for the year. Finally, Fitbit’s own growth in 2018 and 2019 will likely match or exceed that of Under Armour, with new product launches and a weak comparable year for 2017.
Overall, Fitbit Inc (NYSE:FIT) would be a wonderful acquisition for Under Armour Inc (NYSE:UA) (NYSE:UAA). It would create further diversification, accelerate growth, and likely cause significant UA stock multiple appreciation. In retrospect, it is hard to find a major weakness, and I won’t be surprised if Kevin Plank takes notice, and an Under Armour Fitbit merger become a reality.