I've always thought Fitbit (NYSE:FIT) was a short. It is the brother of GoPro (NASDAQ:GPRO). Both are single product consumer tech companies. Both are targeted at active millennials who have discretionary income. Personally, I think my lack of attraction for these devices helps avoid bias. There are probably better articles about the specs of the Fitbit and the GoPro than anything I can write, but my articles provide a more sober viewpoint of the fundamentals of the businesses. The reason why I would never buy either device is because my iPhone replaces them, as it can track my health and film in 4k. Both stocks were exciting IPOs that have deflated since.
Neither of these firms have reasonable valuations. Both Fitbit and GoPro suffer from analyst expectations not tethered to reality. We have seen GoPro estimates cut, but they always seem to be too optimistic. When sales decline from a bubble high, it's difficult to model in the destruction. I would bet a fad such as Crocs (NASDAQ:CROX) had its estimates cut, but still managed to miss them in 2008 when the fad ended.
I think most of this information is widely known. My motivation for writing this article is partially driven by my search for stocks to advise avoiding or shorting because of the market crash I am predicting. Whenever S&P 500 profits fall two consecutive quarters, the market corrects 20%. We are in the midst of determining whether this quarter will mark the second one. By the time the dust settles, the market will be even lower. The flattening yield curve is one of the indicators I use to verify my bearishness; it continues to break lower as the 10-year minus the two-year is now at 1.666%. If you remember from my article on the imminent recession, I made the point that 1.19 was support. I expect it to fill the gap and go negative. What better stock to short than a high-beta consumer technology stock like Fitbit?
My belief that analysts keep Fitbit estimates too high stems from the analogy I thought of. We all know that GoPro and Fitbit are brothers. What you may not realize is the Kindle from Amazon.com (NASDAQ:AMZN) is the ancestor of the Fitbit. The comparison fits perfectly. Both the original Kindle and the original Fitbit were niche consumer technology products that did one thing right. The Kindle was an amazing e-reader. It still is an amazing e-reader as the screen is still better than Apple's (NASDAQ:AAPL) iPad when reading in sunny conditions. The Fitbit is an amazing health tracker. Both the Kindle and the Fitbit were one of the first products in their categories and held dominant market share positions.
Interestingly, both the Kindle e-readers and the original Fitbit watches had black and white screens. This is symbolic for a product that simply gets the job done with no unnecessary "bells and whistles." There isn't a major need to have a color screen on either device. There isn't a need to have apps like the iPhone has. The lack of these features allowed the devices to have exceptional battery life lasting weeks.
I think you know what happened next with the Kindle product. The iPad was released in 2010. The iPad wasn't a better e-reader, but it got the job done. The iPad's ability to quickly search the internet and download apps hurt the Kindle. Once a consumer decided to buy an iPad over a Kindle, the idea of then going out to buy a Kindle made no sense. Adding to this decision was that not only did the iPad have its own iBook Store, it also had the Kindle app available.
Amazon saw its Kindle e-reader lose out to the iPad, so it retaliated with the Kindle Fire in 2011. The Kindle Fire was a color device aimed to steal back sales from the iPad. Amazon even worked on creating its own software on top of stock Android. Sales initially did well. It was the second highest selling tablet in Q4 of 2011.
Fast forward to today, and you can see the yellow bar is non-existent. Amazon was giving away its Fire tablets for $50 this holiday season and consumers still decided to buy the iPad, which costs about 10 times more. It's amazing how bad the Kindle Fire did considering it is promoted on the most popular e-commerce website in the world. Amazon had no credibility in creating the Kindle Fire as it was coming from the e-reader category. The Kindle Fire has a great reading experience, but this competitive advantage was gone because the iPad had the Kindle app. Amazon's strategy to sell content on the Fire didn't work.
The similarities with Fitbit are striking. The Fitbit also is competing with Apple, except it's in the smartwatch category instead of the tablet category. Fitbit is in a worse position competitively because it isn't an e-commerce website. This gave Amazon more visibility than Fitbit can ever get. Just as Amazon retaliated with the color version of the Kindle Fire, Fitbit is retaliating with a color version of the Fitbit Blaze. Fitbit had to retaliate because just as the tablet has many features not on an e-reader, a smartwatch has many features not on legacy Fitbit devices. It's quite ironic that the Fire and the Blaze are similar products because the names are almost identical.
It took over a year for Amazon to come up with a competing product with the iPad. It has taken a slightly shorter amount of time for Fitbit to come up with its retaliatory product. I'm expecting similar results as the Fitbit Blaze will do well initially before losing all of its market share. Just as the Kindle came into the device realm with zero credibility outside of reading, the Fitbit Blaze only has credibility in the health category. It still doesn't even run third-party apps. In one sense, the Kindle Fire was in better shape than the Fitbit because it did run third-party apps at the start. In another sense, the Fitbit is in better shape because smartwatches are used for health tracking more than tablets are used for reading. However, I'm sure Apple will expand the number of tasks you can do on the Apple Watch just as it expanded the number of tasks you can do on the iPad.
Currently, Fitbit is the better device for fitness buffs, according to nerdwallet. It is cheaper than the Apple Watch just like the Kindle was cheaper than the iPad. Both the Kindle Fire and the Blaze retailed for $199. In pricing, Fitbit is in much worse shape because the Apple Watch Sport is $349 while the iPad was $499.
The major differentiator of the Kindle was the reading experience. As I said, this was wiped away with the Kindle app for iPad. Fitbit has an app that is probably the best on the market. However, you can actually use the Fitbit app on an iPhone without a device. Of course, it doesn't measure stats such as your heart rate without a device, but users can still monitor metrics such as the amount of steps taken and create a food plan.
A reasonable decision for an iPhone user would be to buy an Apple Watch and use the Fitbit app on the iPhone occasionally. My point is that just like software did not provide a moat for the Kindle, it won't provide one for the Fitbit. The number of apps featured on the Apple Watch far exceed those on the Fitbit. Even though the Apple Watch is probably the best smartwatch on the market, I still think the Android watches are better than the Fitbit for most users who aren't solely focused on fitness because they have access to third-party apps.
Fitbit is a short because it is a high-beta tech stock in the midst of a market crash. It is brothers with the GoPro and the descendant of the Kindle. The comparison is almost perfect. The only difference is Amazon can afford to lose money on its devices because it isn't its main business. Fitbit can't afford to lose this battle. The final death blow will be when Fitbit puts its app on the Apple Watch because no one is buying the Blaze. This would be like when BBM came to the iPhone. It will be too little, too late. I don't see a future for Fitbit.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.