3 Reasons Fitbit Can Still Survive
Summary
- Fitbit expects revenue to continue declining during 2018, but also expects to perform at free cash flow break-even.
- The IDC projects the fitness wearables market to double by 2021.
- Wall Street analysts expect 28% upside potential in the stock.
Fitbit (NYSE:FIT) has definitely had its share of tough times of late, but I'm starting to see some things that are compelling about its future:
- Fitbit has a long operating runway based on its current liquidity position. This is a luxury that many other hardware companies like GoPro (GPRO) don't have.
- The wearables market continues to show strength and growth potential. Since Fitbit has strong brand recognition, this gives them an opportunity to capitalize on in the future.
- Fitbit has put itself right in the middle of the digital health revolution, which provides a number of intriguing possibilities.
Fitbit also trades at a rock-bottom valuation of 0.7x Price/Sales. I don't recommend going all-in on Fitbit, but I think it's good time to start opening up a small position in the stock. Given Fitbit's enterprise value is also only $460 million, there's huge upside if the company can get back on a growth curve and produce profits again.
1. Fitbit Has A Long Runway To Get It Right
Even though Fitbit's revenue slid by 26% last year, it managed to only burn $25 million in cash (in terms of free cash flow). This tells me that Fitbit can handle both a transition period and weather difficult times. Also consider that Fitbit has $679 million in cash and no debt. This gives the company a very long operating runway and some flexibility.
For 2018, Fitbit projects to break-even in terms of free cash flow. This is impressive considering that revenue is expected to continue declining to $1.5 billion. Lower expenses and a sales mix that's more heavily weighted with higher-margin smartwatches will help Fitbit reach this break-even cash flow goal.
Data Source: Google Finance
2. The Wearables Market Is Growing
According to the IDC, total wearable device shipments reached 115.4 million units, up 10.3% from the 104.6 million units shipped in 2016. While Fitbit's devices sold did slip during 2017, they are still the 3rd leading producer and just behind Xiaomi (XI) (Apple (AAPL) is now the leader, no big surprise there). 2017 and the upcoming year are also transition years for Fitbit as they move away from legacy products and continue to focus more on fitness smartwatch development and its OS platform.
Data Source: Fitbit's public filings
The best news here is the wearables market is likely to continue exploding and is expected to double to 222.3 million by 2021. That equals a compound annual growth rate of approximately 18% from today. Smartwatches, in particular, are expected to drive this growth and more than triple to 149.5 million by 2021. This is good for Fitbit because if they maintain their market share, there will be significant revenue and profit growth given smartwatch sales have a higher ASP and are higher margin.
3. Fitbit Is Betting On Digital Healthcare
Out of all the things wearable technology can do, I think its impact on healthcare is the most compelling and Fitbit is making a big effort to be a part of it. Here are a few of the recent partnerships/developments for Fitbit:
- Dexcom Partnership - Dexcom CGM (continuous glucose monitoring) users will be able to see CGM data on the Fitbit Ionic smartwatch, which will provide consumers a convenient way to track glucose levels. Fitbit and Dexcom are targeting availability sometime during 2018.
- Fitbit is 1 of 9 companies that have been selected to participate in the FDA's pre-certification pilot program (Apple and Samsung (OTCPK:SSNLF) are also participating). This program is intended to create a better approach toward digital health technology by looking at the digital health technology developer, rather than primarily at the product. The goal of this program is for the FDA to determine whether the company meets quality standards and if so, to pre-certify the company.
- United Healthcare Partnership - an employer wellness program that allows Fitbit's devices to track against activity metrics. The program is intended to drive better health outcomes and bring savings to both consumers and employers.
The possibilities here are literally endless. There could be a day where smart watches or fitness trackers become FDA-approved medical devices and can have more sophisticated health monitoring capabilities. That also opens up the possibility that Fitbit is reimbursed with medical insurance in certain circumstances.
Historical Valuation
In terms of Price/Sales, Fitbit trades very cheap. Back when the company was profitable, you can see that this ratio was always above one and even higher post-IPO. This basically tells me that if Fitbit can get back to growth and profitability, this ratio will increase and provide solid upside potential.
FIT PS Ratio (TTM) data by YCharts
Conclusion
Fitbit is still in the midst of a transition period, but there's a lot for the company to be positive about. While revenue is expected to decline this year, the device mix is going to improve (i.e. shift to more smartwatch sales). This is expected to put Fitbit at free cash flow break-even for the year and I believe it will put them in good shape for future growth given the expectations of the global wearables market over the next couple of years.
I consider now a good time to open up a small position while the stock price remains at a bargain valuation. Consider that Fitbit's enterprise value is only $460 million right now. A Price/Sales ratio of 0.75x looks cheap enough, but EV/Revenue looks even better at 0.28x (source: Yahoo Finance). Wall Street agrees given an average target price of $6.55, which represents 28% upside potential.
This article was written by
Analyst’s 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.
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Comments (41)
I belive they have $500m cash. Do you think they worth only $2B ($10 stock)
Anything FIT can do Apple will do equally as good or better.
Thats why meaningful Fitbit share appreciation is highly unlikely despite what a few underwater longs are hoping for.I would also remind that many NIH apps have long been available on the Apple app store.
Uncle Sam ain't going there especially under this administration.
Obesity has been a problem, growing problem (pun intended) for decades.
In regard to smoking. It is a terrible vice and problem but each year the number of smokers falls.
Btw, Fitbit will not prevent any of our health problems. It is up to us as individuals.
Uncle Sam ain't going there especially under this administration.
Obesity has been a problem, growing problem (pun intended) for decades.
In regard to smoking. It is a terrible vice and problem but each year the number of smokers falls.
Btw, Fitbit will not prevent any of our health problems. It is up to us as individuals.
In the negative scenario the range could be 4 to 6, so it is more prudent to sell 4 strike puts going forward even if no 5 strike put ws exercised in the last 13 months and they provided good return.
