By Joseph Hogue
Fitbit Inc (NYSE:FIT), the one-time leader in the space, has seen its shares plunge 82% since its 2015 IPO. Most investors have written the company off as a has-been with little chance to recover.
But I’ve found three reasons that the device maker surge by as much as 52% through this year and next.
Does Anyone Want A Piece Of The Wearables Market?
The liquidation of Jawbone last week follows a pullout of the wearables space by several other high-profile companies. Microsoft pulled its Band activity tracker last year after the second edition failed to create much buzz.
Even Nike, with its legions of professional athlete sponsors, pulled its wearable, the FuelBand, late last year.
Now just five companies are left with any significant market share in the wearables market.
Apple and Samsung continue to develop their smartwatch products, though sales have been underwhelming. The Apple watch overtook Fitbit during the first quarter of 2017, with 14.6% of the market according to researcher IDC. Fitbit’s reported shipments of 3 million devices gave it 12.3% of the market.
Garmin and Samsung are distant competitors with just around 5% of the market each. Xiaomi is the market leader with 14.7% by virtue of its popularity in China, but is still relatively unknown in the United States.
Fitbit has seen sales fall to $1.96 billion over the trailing year and management has issued guidance of between $1.5 and $1.7 billion in revenue for 2017. The company reported a net loss in the last two quarters and expects to report a loss of between $0.22 and $0.44 per share this year.
Why Fitbit Shares Are Underappreciated And Way Undervalued
In all the despair, the market is missing some factors that could send Fitbit shares soaring soon and may even make it a takeover target:
1. Fitbit Is Jumping On The Smartwatch Trend
Fitbit acquired smartwatch startup Pebble last year and is developing its watch product for a fall release. The watch will accept digital payments and play music via the company’s partnership with Pandora.
Fitbit is leveraging the strong developer network from Pebble to create an app store for the watch and developed a unique operating system.
Besides the smartwatch, Bloomberg sources have reported that Fitbit is scheduled to release multiple products in 2018, including the Charge 3, Blaze 2, and a new version of its popular Aria scale.
The Charge 2 and Blaze, released earlier this year, unveiled the company’s revolutionary Sleep Stages tracking app developed in conjunction with experts from Johns Hopkins and Stanford University. The tracker provides sleep and rest pattern insights at a level that was previously only available by going to a sleep lab.
It’s this kind of tech upgrade that keeps users coming back for new products and could win over new adopters.
2. The Company Still Has A Strong Brand In A Growing Market
Fitbit has sold more than 63.5 million devices, with 50 million still registered and 25 million active users. It’s a leader in the health and fitness category and continues to sign corporate partnerships. In June, the company partnered with the Minnesota Timberwolves as its official wearable and sleep tracker.
The retreat of companies from the wearables space might give you the impression of a declining market. On the contrary, global shipments for the wearables market jumped to 22 million units in the first quarter, 21% higher than in the same quarter last year. Competition is intense but the market is growing on consumer adoption and is expected to reach 125.5 million devices globally this year.
For all the talk of Fitbit losing its market-leading position, remember that only 2.4% of market share separates the company from the market leader. All it takes is a couple of new product launches to capture a significant part of the market and take back that leadership.
3. It Has An Amazing Balance Sheet
Beyond the potential for new products to drive sales, Fitbit has one of the most attractive balance sheets I’ve seen in a long time. The company has $726 million in balance sheet cash and just $56 million borrowed on its credit facility with no long-term debt.
That means Fitbit’s net cash is $670 million, or 51% of the market cap!
The company isn’t without its risks, but it has too much intellectual property and assets not to make investors feel bullish. If the smartwatch launch doesn’t go as planned, I see the company shopping itself around or attracting the interest of an activist investor or private equity.
Shares trade for just 0.6 times sales compared to an industry average of 2.9. News around the smartwatch launch could help drive shares higher in anticipation, but we could see even more appreciation later in the year if outside interest starts building on the company’s assets. My target price of $8.75 is based on a multiple of 1.25 times management’s expected $1.6 billion in 2017 sales.