Fitbit Q2 16A – Breathing space

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Fitbit has earned time to develop its ecosystem. 

  • Fitbit reported good Q2 16A results as demand continues to be steady while the company works on its ecosystem.
  • Q2 16A revenues / adj-EPS were $586.5m / $0.12 compared to consensus at $578.2m / $0.11.
  • 7m devices were shipped (up 27% YoY) which was particularly encouraging given Apple’s 50% decline YoY.
  • Although life is much tougher now than it was 12 months ago, Fitbit is still profitable and is generating cash meaning that it will be able to launch new products as well as work on its ecosystem.
  • Although most attention remains on the hardware, it is the development of the ecosystem that will determine whether Fitbit thrives or withers.
  • The vertical that Fitbit has chosen is digital health and wellness which makes sense given that the only success that wearables have really found to date is within this segment.
  • The idea is to get users to upload, share and analyse their data in the cloud such that they become more engaged and use the device more.
  • Wearables suffer greatly from users getting fed up with them and leaving them to gather dust in drawers which is something that Fitbit must address.
  • it has been much better than its competition at keeping users engaged. but still only a small percentage of the 49m devices that Fitbit has shipped to date are still in use.
  • If Fitbit can keep its users engaged and generating data, then it users will choose its devices when they come to upgrade giving it the ability to earn better margins.
  • Furthermore, if it can become a go to place to store health and fitness data, it could expand into other device types along the same sort of lines and users will have a strong incentive to stay.
  • Its chief competitor in this space is Apple with its HealthKit API but given that 87% of the world and more than 50% of USA do not use an iPhone, there is enough space for Fitbit to grow into.
  • Despite the stabilisation at Fitbit, its guidance for the full year continues to look very ambitious.
  • Fitbit earned adj-EPS of $0.22 in H1 2016A, and is guiding for $0.17-$0.19 in Q3 16E and $0.72-$0.84 in Q4 16E.
  • Fitbit is very dependent on the holiday selling season and I think it will have difficulty in meeting the very heavy year end expectations.
  • With the shares on 25x 2016E PER, there is not much room for error and it will be some time before its fledgling health ecosystem gains critical mass.
  • Hence, I would be inclined to wait before looking at this one seriously again.
  • That being said, I would have it in a heartbeat should I be forced to choose between this, GoPro and HTC.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.