Fitbit: Working On A Subscription Stream Catalyst

Summary

• Fitbit hits new lows as Morgan Stanley lowers the price target to only $4.
• The fitness tracking company has a problem with lumpy revenues.
• A focus on subscription-based revenues will solve the revenue issue in the future.

As my recent research on Fitbit (NYSE:FIT) regularly highlights, the fitness tracking device company has an issue with recurring revenues while having a loyal user base. Fitbit is too dependent on repeat purchases of a product that doesn't need regular replacements and a big reason why Morgan Stanley (MS) downgraded the stock with a price target of $4. Now though isn't the time to abandon the thesis.

Lumpy Revenues

The stock trades at all-time lows as the market has become disenfranchised with the lack of a predicable revenue stream. The company though is working on a solution to that problem that might add huge value to Fitbit.

Over the last three years, revenues have consistently bounced around though trending down from the quarterly highs in Q4'15.

FIT data by YCharts

Combined with weak revenues, the stock has been hit due to the company missing forecasts. The double whammy of declining revenues and missed estimates is the recipe for a very weak stock.

Source: Seeking Alpha - earnings tab

Premium App Focus

The company acquired the Fitstar app back in 2014 and recently upgraded the app and rebranded the coaching service to Fitbit Coach. Along with the recent purchase of Twine Health, Fitbit continues to move into premium services and recurring revenue streams.

Source: Fitbit press release

Fitbit Coach provides personal trainers for users. The app provides tailored adaptive workouts and recommendations based on the usage tracked by Fitbit tracking devices. The signs exist that consumers want coaching and the company has moved further into fitness apps with FitStar Yoga.

According to a study a few years back, app users were more active than non-users. The conclusion of the study was as follows:

Exercise app users are more likely to exercise during their leisure time, compared to those who do not use exercise apps, essentially fulfilling the role that many of these apps were designed to accomplish. Data also suggest that one way that exercise apps may increase exercise and health outcomes such as BMI is by making it easier for users to overcome barriers to exercise, leading to increased self-efficacy.

The key to the story though is that the app offers premium services for $7.99 per month. Or consumers can pay a very reasonable $39.99 per year subscription.

The Fitstar app had 6.8 million downloads up to the release of an updated app at the start of January 2017 that added another 1.2 million downloads prior to the Q4'16 earnings call. As the company mentioned on the recent Q4 earnings presentation, premium paid users had grown by 73% last year.

Source: Fitbit Q4'17 presentation

Active.com doesn't list the app as a top fitness app after ranking the previous FitStar app as the #14 top fitness app. MyFitnessPal from Under Armour (UA, UAA) was listed as a top two app both years. Right now the category is wide open with no dominant player, providing plenty of opportunities for Fitbit to use strong brand recognition to grow the Fitbit Coach app while Twine Health provides a coaching platform for chronic health conditions that extend the reach into health plans. Both provide the ability to grow subscription-based revenues.

Revenue Potential

The biggest question is where this can go. With 76 million devices sold and 25 million active users, one million paying users seem reasonable down the road. After all, corporations might pony up the annual fee to encourage employees to go beyond 10,000 steps per day.

The big problem for Fitbit is that $40 per year will only amount to $40 million in recurring revenue. At 5 million paying customers, the revenue stream would surge to $200 million. Assuming a high mix of monthly payers bringing the total to $5/month per sub, the revenue on five million customers would reach $25 million per month or $300 million annually.

The company still targets reaching annual revenues of $1.5 billion, so a recurring revenue stream from premium services isn't going to move the needle at this point. Consumers would have to sign up for coaching for four consecutive years to match the revenues from a product that typically costs over $150.

Takeaway

The key investor takeaway is that Morgan Stanley is probably right that Fitbit needs a couple more years to build a meaningful recurring revenue stream. The stock, though, is incredibly cheap with a market cap of $1.1 billion and a cash balance of nearly $700 million with the future catalyst of a recurring revenue stream in the fitness and health category.

Analyst’s Disclosure: I am/we are long UA. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.