Fitbit – Market timing.

Reply to this post

Perfect timing gives Fitbit its best chance of making it.

• Wearables maker Fitbit has timed the market perfectly, in announcing that it will raise $100m in an IPO.
• From its IPO documents it is also pretty clear that Fitbit is pinning its long-term future on building an ecosystem around its devices that will keep users choosing to use a Fitbit device.
• The good news is that there is money to invest in this strategy as the documents also reveal that the company is more profitable than I had given it credit for.
• In 2014A revenues / EBIT were $745m / $158m representing over 174% growth in revenues and 21.2% EBIT margins.
• 9m devices were sold with an ASP of $68 and the company reported that it has 9.5m active users.
• This is somewhat lower than I would have expected given that the company has cumulatively shipped 17.0m devices in the last few years and the fact that it is by far the stickiest wearable product on the market. (No data yet for Apple Watch).
• This points to a higher replacement rate than I expected and also raises question marks about the long term strategy.
• Fitbit needs to create an ecosystem around its devices in order to maintain long term profitability, but the number of users is not nearly enough.
• Furthermore, this is an ecosystem created around health and fitness which is both a crowded and competitive space where the juggernaut of the sector has just entered.
• However, Fitbit’s devices are just a fraction of the price of the Apple Watch and so the focus must now be on growing the user base as quickly as it can.
• With all networks and ecosystems, their value or utility increases by the square of the number of users or devices that are attached to them.
• Consequently, if Fitbit can grow a large and loyal user base, then it should survive the worst that the market can throw at it.
• This would even include my bearish prediction (see here) that, like digital cameras, the demand for pedometers will be eaten up by smartphones as their ability to track physical movements continues to improve.
• This is why outside of the quarterly twists and turns in the fortunes of Fitbit, the most important number to watch will be how many active users the company has.
• In the grand scheme of things, the numbers are tiny as RFM believes that 100m users are needed to make an ecosystem viable and 300m to make it very successful.
• However, health and fitness is a focused area this means that less investment is required to offer users a great service.
• Therefore a lower total number of users is needed to be successful.
• However, Fitbit will be open to the risk that one of the bigger players makes a realistic play for the segment and uses its scale to push Fitbit out of the market.
• With positive cash flow, despite heavy capex and working capital requirements, there is $200m in the bank which gives Fitbit the ability to invest and grow its ecosystem.
• Fitbit has timed its IPO beautifully which is likely to mean strong demand and a successful debut.
• This combined with the cash reserve gives it a fighting chance but it must focus on delighting users and keeping them within its ecosystem otherwise, it too, will eventually fall by the wayside.