Fitbit and GoPro – Horrific Halloween

Reply to this post

I see acquisition as the endgame for both players. 

• GoPro and Fitbit have both been hit again by the simple fact that their products are commoditising and that they have been late to generate user stickiness through the ecosystem.
• Fitbit reported Q3 16A revenues / adj-EPS of $504m / $0.19 compared to estimates of $508m / $0.19.
• However, guidance for the critical Q4 holiday season missed estimates by 25% with Q4 16E revenues / adj-EPS of $725m – $750m / $0.14 – $0.18 compared to forecasts of $981m / $0.75.
• Soft demand and some production issues were blamed for the shortfall but at the end of the day it is increasingly clear that Fitbit’s products are commoditising fast.
• GoPro fared little better with Q3 16A revenues / adj-EPS of $241m / LOSS$0.60 some 22% below forecasts of $310m / LOSS$0.37.
• GoPro also went on to say that Q4 16E would also miss estimates with revenues of $600m – $650, some 8% below what the street was looking for.
• GoPro blamed production issues around the Hero 5 black for the shortfall but I can’t help wondering how many users bought the perfectly good, and 37% cheaper, YI 4K Action Camera instead.
• YI (Xiaoyi in China) is also coming out with a drone which will carry its 4K camera like the Karma does and this too, will be a t a substantially lower price.
• Furthermore, when one looks at Fitbit, sales in Asia were down 45% in Q3 16A primarily as a result of a plethora of cheap and adequate health tracking products from Chinese brands such as Xiaomi.
• These are the issues that beset both Fitbit and GoPro which could have been avoided if they had begun development of their ecosystems much earlier.
• Unfortunately, like most companies that experience sudden and rapid growth, they have become reactive rather than proactive which is what has landed them in this pickle.
• If GoPro and Fitbit users knew that they would have an easy to use, fun and vibrant ecosystem to enhance their health monitoring or home movie experience, they would want to stay rather than experiment with far cheaper Chinese equivalents.
• Both seem to have cottoned onto this concept now but they have only done so once they got into trouble which is much too late.
• This means that their ecosystems are neither mature enough nor large enough to provide the kind of stickiness that they so desperately need.
• The result is that users don’t seem to mind leaving to try something else as they have nothing invested in these companies beyond the hardware.
• Without that critical stickiness, GoPro and Fitbit have to compete on price which is something they cannot afford to do given their high cost base in developed countries.
• This is why I fear the end game for both of these companies is acquisition.
• Their hardware is excellent but users are increasingly not willing to pay a premium for it, meaning that gross margins and revenues are going to come under sustained and intense pressure.
• Someone with a strong ecosystem such as Apple, Google, Tencent, Alibaba or Baidu could easily pick these companies up and combine their good hardware with their own ecosystems to make them much stickier.
• However, in the absence of M&A, the outlook is very bleak indeed and their shares are likely to continue to suffer from heavy selling pressure.
• The question is at what point do the shares sink so low that the acquirers are flushed out?
• I suspect the answer is lower than where we are today.