International Data Corporation's latest smartwatch results have added cautionary sentiment to the smartwatch and wearables category. A report by IDC issued last week describes a 32% fall in the global smartwatch market and a steep 55% decline in Apple's ( AAPL) Watch sales from Q2 2015 to Q2 2016. As I've often stated, IDC has never, not once found their long-term forecast for any particular category sales to be accurate. What analysts generally deem to be within a respectable degree of accuracy finds a margin of error consistent with +/- 2 percent. Unfortunately, IDC exceeds this margin of error in perpetuity. For this reason, I have never relied on the forecasting from IDC and for any product category. Having said that, their sales tracking does maintain a higher degree of accuracy or efficacy.
Within this narrative and utilizing IDC's latest sales data, Fitbit (NYSE:FIT) investors may be found to better understand the difficulties surrounding smartwatch sales. Additionally, readers and investors may also come to understand that while Fitbit has possibly taken a more advantageous route into the smartwatch sub-category, it may still be found wanting for sales growth in the sub-category long-term. Before we dive into this exercise in analytics, let's briefly review my latest forecast for the smartwatch category, which has caught fire overnight.
On July 25 th I authored an article titled " Apple's Smartwatch And The Smartwatch Category Facing Retail Discontinuation By 2018". It will be obvious to many that my forecast for the smartwatch sub-category is not favorable as the title of the article indicates. As a hardware and consumer products industry expert, I was one of the first to convey great concern surrounding the smartwatch and wearables growth sustainability. Since the beginning of 2016, much of my forecast and sentiment has come to fruition in the recognizable sales results emanating from the wearables category. As the marketplace for wearables has expanded, the category has become increasingly saturated and found sales growth greatly decelerating YOY and sequentially. The smartwatch sub-category has performed even worse, with outright sales declines and long-term vendor sales declines that began with the introduction of the smartwatch in 2013.
The smartwatch has found sales growth difficult to come by for a variety of reasons as bulleted below:
- High price points
- Redundant utility with that of the smartphone
- Incapable of photography applications
- Incapable of gaming applications
- Lacking telecommunications privacy
- Poor battery life
- Slow app development
- Slow connectivity
- Dual connectivity and wire line monthly fees
The bullet points that outline just a few of the reasons smartwatch sales have declined, even within the early adopter period, are supported by retailers needing to clear smartwatch inventory with discounts and fewer orders. The Apple Watch has been permanently discounted with the average selling price over the life span of the product exhibiting the discounted price. This is something not previously recognized in Apple products since the introduction of the iPod over a decade ago. Such a seminal action on the part of Apple underscores the issues with the smartwatch sub-category and concept of a smartwatch as a whole. And for all of the noted reasons and conceptual shortcomings of the smartwatch I have issued my forecast for the smartwatch as follows:
Smartwatch category and/or products will be discontinued from mainstream retail sales by 2018." There, I've said it. Never seen those words before have you? Maybe you have seen these however, " Keurig Kold will end badly for many." I guess what I'm attempting to offer is that if it is forecasted to be, it can become possible as I've generated predictive forecasts in the past for widely hyped products.
Akin to when I forecasted the discontinuation of the Zune, 3D Television and Bluetooth mobile earpieces, I'm expecting the shortcomings in the utility and limited benefits of the smartwatch to exhibit my forecast for the smartwatch category over time. With my logical and supported forecast issued, I will now offer more supportive data to align with my forecast and previously issued sentiment for wearables and smartwatches. IDC is generally a great soundboard for which to develop a premise and build upon a forecast.
I've previously stated that IDC will be found constantly revising their estimates for the wearables and smartwatch category. As of late, that has come to fruition and will likely build momentum into the future. Take a look at IDC's forecast issued in March below:
FRAMINGHAM, Mass. March 17, 2016 - Worldwide shipments of wearable devices are expected to reach 110 million by the end of 2016 with 38.2% growth over the previous year. According to the International Data Corporation Worldwide Quarterly Wearable Device Tracker, an expanding lineup of vendors combined with fast-growing consumer awareness and demand will generate double-digit growth throughout the 2015-2020 forecast period, culminating in shipments of 237.1 million wearable devices in 2020.
Now, flash-forward to the June forecast issued by IDC and note the change:
FRAMINGHAM, Mass. June 15, 2016 - Worldwide shipments of wearable devices are expected to reach 101.9 million units by the end of 2016, representing 29.0% growth over 2015. According to the International Data Corporation Worldwide Quarterly Wearable Device Tracker, the market for wearable devices will experience a compound annual growth rate (OTCPK:CAGR) of 20.3%, culminating in 213.6 million units shipped in 2020.
Not only has the year-over-year growth rate declined greatly, but IDC has reduced the long-term growth rate by roughly 24mm units or greater than 10 percent. Most obviously, the margin of error discussed earlier is found greater than the level of reliability desired by analysts for building sales models, rendering IDC's forecasting relatively unusable. If we advance the reduction in sales forecasted revisions at 10% annually, by 2020 we are looking at a wearables category shipping just over 100mm units in 2020 and back inline with 2016 levels. Math and logical reasoning, that's all it takes to understand why investors have shied away from investing in the wearables category. When I'm asked, as is often the case, as to why I don't place value in IDC's long-term forecast it's very clear as to why. There simply is not a basis for which to rely on their long-term projections. Dedicating investing capital in a product category or company participating in a product category while relying on IDC forecasts generally proves faulty. Let's hope for the sake of the wearables vendors that this does not continue, but more than likely it will. Additionally, the reasoned math offered also supports my long-term forecast for the sub-category of smartwatches as one can imagine this lesser category would be more egregiously affected given the state of sales declines already existing in the segment.
For now, the wearables pie is still growing albeit at a far more muted pace than in previous years. And as it pertains to Fitbit, the company's sales are growing, but at a similarly muted rate to that of the overall wearables category. Fears of competition have plagued FIT shares and its shareholders, but within the competitive market naysayers have little more than blanket competitive threat statements to go on. I suggest this as you would be very hard pressed to locate an increase in product placement anywhere in the world for competing devices. It's one thing for new products to exist, it's another for the consumer to become aware of the product and find it at retail. This is one of the reasons 85% of wearables sales were captured by Fitbit in Q1 2016. So even with the wearables pie growing, Fitbit can relinquish market share and still achieve its stated growth objectives for 2016. It should also be noted that some of that growing pie and market share erosion by Fitbit came in previous reporting by IDC's recognition of former Apple Watch sales. This came at a time prior to the launch of Fitbit Blaze, which surpassed sales of the Apple Watch early in Q2 in many mainstream retail channels. (Total Blaze sales results undetermined presently) So it stands to question where Fitbit's market share of the wearables category stands at present and given the aforementioned variables. Moreover, this aspect of sales potential for Fitbit is not withstanding the company's ability to generate forecasted profits. That is something still to be determined and/or presented to investors.
As I travel throughout the world, I rarely see anything more than people wearing Fitbit devices if they choose to wear a fitness tracker. As I visited Italy last week with family, I counted 62 people wearing a Fitbit device and only one other device that was an Apple Watch. While this is highly anecdotal and meant to be as such, it is still in fitting with the relative sales sample set offered by NPD Group for wearables sales tracking on a quarterly basis. For all the competitive threats positioned or proposed to be impeding the progression of sales by Fitbit I could not find a single Xiaomi Band worn in Italy and many of the visitors were from the Asia-Pacific region. While riding the Eurorail, the woman seated in front of me was wearing a purple, Fitbit Charge HR device…number 62 as I was heading to the airport. In speaking about Xiaomi and its dominance in the Asia-Pacific region, given it's low-cost leading wearables, the fact that Fitbit recaptured the top spot for activity tracker app downloads in China recently speaks to the status of the competitive threats perceived.
All wearables sales are exhibiting slowing growth and for the most part growth has come by way of new product introduction and not organically. Fitbit's struggle has and will continue to be the ability to demonstrate long-term sales growth beyond distribution growth and new product deployment, which both are forecasted to continue in the back half of 2016. A new Charge and Flex product are due to be launched in the coming weeks and ahead of the holiday shopping season that is rapidly approaching. With these aspects in play shares of FIT have remained under pressure.
Moreover, Fitbit's participation in the smartwatch sub-category has been summarily dismissed by IDC due to the lack of 3 rd party apps applicable by Fitbit's Blaze smart fitness watch. In short, IDC has made the decision that Fitbit Blaze will not be classified as a smartwatch. We can argue all day as to the validity for the decision or lack of validity, but to what end? What I would propose is that the declines in smartwatch sales underscore the more appropriate price point and product development of the Fitbit Blaze smartwatch. With the Blaze usurping sales of the leading smartwatch vendor and that smartwatch vendor aligning the utility of its smartwatch to mirror the utility of the Blaze, it validates the Blaze as the paradigm for the sub-category. Even Samsung, which is ranked #2 in smartwatch shipments, has reduced its price for the latest Samsung S2 Gear Classic to the same price of the Blaze, $199.99. Even in doing so Samsung has sold nearly half of what Fitbit sold with the Blaze product during the Q2 period. Unfortunately for Samsung, even its latest smartwatch deployment has been found wanting for greater sales growth as the company shipped nearly half of the units it shipped when it released its first smartwatch in 2013. Fortunately, for Samsung, it has found greater distribution over this time to facilitate sequential sales growth through its retail partnership with AT&T (NYSE:T). Most importantly, from most any angle one analyzes the smartwatch sub-category, it would be difficult to argue that Fitbit hasn't developed and deployed the optimal product for greater unit sales. Dollar sales are a whole other story and profit an even more convoluted story to forecast or hypothesize over with regards to smartwatches. Nobody seems to be generating meaningful profits in the smartwatch category as Fitbit's spending has diminished FH16 EPS expectations and Samsung is literally giving away its smartwatches for free with the purchase of a smartphone. Not for nothing, but I'm preparing to upgrade my smartphone to the Galaxy S7 Edge and capture this free smartwatch gift. It's not actually free though, as I will have to pay the connectivity charge and monthly data charge that is separate of the smartphone data charge. Another reason smartwatches have been difficult to sell to consumers.
Fitbit will report quarterly results next week and as a trader, owning presently, of the stock I'm of the belief the company will meet and/or beat analysts' expectations for the Q2 2016 period. More importantly and as evidenced in previous quarterly releases, investors will likely key off issued guidance by management. The FIT share-boat has leaned greatly to one side now for the last 6 months and may be due for a leaning in the other direction, speculatively speaking.
If you found the delivered analytics and reporting of value, please feel free to follow me in real time on Seeking Alpha and on Twitter (NYSE:TWTR) via my Twitter feed. In advance of Fitbit's quarterly release I will hope to deliver a quarterly preview with a dedicated focus on modeling past results and expected results for Q2 2016.
Disclosure: I am/we are long FIT.
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.