From a standing start less than ten years ago, Fitbit Inc. (NYSE:FIT) has grown into a company with sales of almost US$2bn. It has been a remarkable growth story.
Fitbit essentially created a new product category, wearable technology. Its products record a multitude of things we previously didn’t know we needed to measure every second of the day, including heart rate, sleep quality and how many steps we took to grab that afternoon double vanilla latte. It has launched new products and entered new markets. Almost as impressively, it has generated solid and growing profits when many of its Silicon Valley brethren are struggling to prove their business models.
So then why is its stock price down 73% in the last 11 months? Something seems to be amiss. In the most recent quarter, Fitbit reported a 92% increase in sales, a 15% operating profit margin, and 37% growth in earnings per share. It has a ton of cash and no debt. These are drool-worthy results. Yet it is trading at only 12 times 2016 expected earnings. Any other tech company with similar results would be trading at astronomical multiples. Facebook? Try 37 times next year’s earnings. Twitter? A cool 29 times. Square isn’t even expected to be profitable next year but while Fitbit is selling for less than one year’s revenue, Square trades at more than six times.
Truth be told, those aren’t fair comparisons. For all of Fitbit’s success, it is mainly a consumer gadget company. Perhaps a more worthwhile comparison is Apple, which also trades at 12 times earnings. Both companies need to keep selling vast amounts of physical product each year just to maintain their current profitability. The others mentioned are software driven platforms selling services that are much harder to replicate.
And that’s the rub. It is hard to imagine a world where everyone suddenly stops using Facebook. But your Fitbit? Now that your smartphone is able to provide you all the same data, you might just chuck it in the trash. Maybe you already have.
This is why the stock has collapsed and why it trades at such a low P/E ratio. These other companies trade at higher ratios because investors believe they will continue to grow at elevated rates, and at some point in the future, those ratios won’t look so high. Investors in Fitbit obviously do not believe it will continue its dizzying level of growth. Is this the next Kodak?
So here is my question to you? Will you Fitbit in the future? Are you familiar with its devices, and do you believe it provides a compelling service? The company is attempting to do more with its data and connection to the consumer by offering specialised health tracking services. Is this of interest, and does it differentiate Fitbit in any way? Is your historical data important to you? If you are considering a new device, would the fact that your historical data is with Fitbit likely sway your decision?
I’m curious to know what people think and appreciate any feedback.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.