Does Fitbit Fit in My Portfolio?

Wellness is big business in America, and health based companies have taken Wall St. by storm. But for one company’s stock, the storm is nothing but clouds and rain. I’m talking about Fitbit, Inc (NYSE: FIT). But will the clouds eventually clear for this company?

Fitbit is a leading manufacturer of wearable fitness devices that track things like calories burned, sleep metrics, steps taken, distance, heart rate, and other things. Many have GPS and can connect to your phone to show text messages, etc. Most of them fit on your wrist like a watch, and I believe that all of them can connect to your smart phone via an app that will display and analyze your health and workout statistics.

Now I’ve never used one of these things, but I got interested in the company when several friends and a few people I work with started using them. Then I started noticing them in stores, a LOT of stores. Stores you wouldn’t necessarily associate with ‘wellness electronics’. These things are everywhere. I got really interested in the company when I heard about their corporate wellness business.

Fitbit doesn’t just make these devices and sell them through their website and various retail outlets. They reach out to companies and make agreements to provide large numbers of units that the company in turn provide to employees. Many companies go with the more basic, low cost products, but some allow employees to pitch in and upgrade to more expensive units. Some companies even subsidize the cost of the more expensive units. Last year Target (NYSE: TGT) gave 335,000 of its workers a Fitbit device. Other corporate accounts include BP (NYSE: BP), Bank of America (NYSE: BAC), Time Warner (NYSE: TWX), and GoDaddy Inc. (NYSE: GDDY). There are plenty more. This business makes up nearly 10% of Fitbit’s revenue.

When I think of the opportunity in corporate wellness, I see dollar signs. Think about the benefits to the companies involved. They are providing a benefit that many employees will see as a positive. And what about health care costs? Encouraging healthy lifestyle choices can only be good for health insurance costs. Who isn’t worried about the cost of health insurance these days? I know my personal costs have gone WAY up in the past year.

Fitbit was founded in 2007, and went public in the summer of 2015 for $20 a share. Fitbit bulls are all about growth growth growth. In the short time the company has been public, it has proven the potential to grow. Growth in the short term is not really in question. And by all accounts Fitbit has had an awesome holiday season. So why did the stock rocket up to nearly $52 dollars post IPO, only to drop down to $16 bucks a share where it’s currently trading? Well, there are some issues. (There are always issues.)

One problem is the number of companies that want to get into the wearable fitness tracking business. There are some BIG names that want a piece of the pie, and a few that investors are wary might jump in as well. Names include Under Armor (NYSE: UA), Apple (NASDAQ: APPL), Nike (NYSE: NKE), Samsung, and about a zillion others. It makes sense; if there is money to be made, these companies want in too. Fitbit is THE name in the space at the moment, but will that be the case in 2 years? 3 years?

Another concern is Apple. While listed as a competitor above, this is a slightly more fundamental concern for all companies involved. What’s to prevent this entire industry from simply becoming an app on everyone’s iPhone? Sure it’s a little more complicated than that, but Apple already makes a watch. Maybe Apple simply uses its enormous resources and customer base to basically incorporate this entire industry into its already large ecosystem.

On January 5th, Fitbit stock fell over 18% after the company introduced its newest product, the Fitbit Blaze, a ‘smart fitness watch’. Invertors were not impressed. The market is apparently comparing Blaze to Apple’s watch. Investors seem to think that Fitbit is taking on Apple with a product that has less features. Blaze has no internal GPS, can’t call or reply to texts, and can’t support third party apps. While Blaze is much cheaper, people feel that it won’t compete with Apple’s product. Fitbit bulls maintain that it’s not really supposed to compete with Apple. I kind of agree, but I wouldn’t be surprised if Blaze is a disappointment compared to some of Fitbit’s other products.

Another problem is a class action lawsuit claiming that the heart rate monitoring technology Fitbit uses is inaccurate, especially at higher heart rates. It’s a little early to tell if the lawsuit will go anywhere, but it’s certainly a concern. Investors who’ve lost money in Fitbit are also seeing an opportunity for litigation.

Many articles out there now compare Fitbit to GoPro (NASDAQ: GPRO). Both electronic companies were high fliers post IPO, both face severe competition, and both are having a tough time on Wall St. Both intend to drive sales and awareness via social media. (Becky ran 3.4 miles today and burned 500 calories, what have YOU done?) Some say that Fitbit is destined to fall as hard as GoPro. Fitbit, even at $16, is still priced for WAY, WAY more growth than GoPro when you look at their P/E multiples. If that growth is called in to question on the same scale as GoPro’s has, Fitbit could see mid single digits easily. That’s a sobering thought right there.

So where does this leave me, your average investor and amateur blogger who’s interested in the company? I can’t pretend to have any long term clarity on where this industry is going. I believe the wellness space will be strong for a long time, but wrist based wearables that are primarily fitness devices? I have no idea. I do believe that for the next couple of years, at least, Fitbit will dominate this space. I like the company based on that, but I am cautious.

As I write this Wednesday night, the 27th of January, Fitbit closed at $16.05, very close to its all time low of $15.52 from a week ago. Of course I’d like to get in lower than that. The company should be reporting earnings soon. Even if the earnings are good and the stock pops, I bet there’s a good chance that a lot of the burned investors use that as an opportunity to sell. So maybe it drops immediately after said pop, and people get even more frustrated and sell. Or it may simply continue tanking before earnings. I’m looking to become VERY interested in this company at the $10 to $12 level. Concerns over competition or the latest product might push it that low. A lack of execution would probably push it a lot lower. Investing involves risk, who knew?

Of course it’s one thing to have these scenarios in my head, but it may never reach my price. It might go straight to 50 again without me… and that’s ok. While I like the company, I’m not comfortable with the current price. Most things are attractive at a certain price, and for Fitbit, I have mine.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender