What does the future hold for Fitbit?
Fitbit, a maker of wearable fitness-tracking devices, is set to IPO today at a price of $20. This results in a valuation of $4.1 billion. The company is raising $732 million without accounting for the overallotment option.
The company was a pioneer in the field of fitness wearables. Over the years it has build a strong brand. It currently enjoys the position of a category king in the fitness wearable market. It has a market share of 68% in the US according to NPD group. The snapshot below will highlight its glorious performance:
The J curves that we see above are impressive, but I don’t think the trend is going to persist in the future. The wearable market is under going a seismic shift. Fitness wearables are going to stop being just devices. It is going to become a platform on which developers can build apps. The devs will leverage the sensors.
Fitness Wearables are going to transform from being just devices to being platforms.
Fitbit and the likes were great in the ‘device era’. You snap it on your wrist and it functions wonderfully, but it works in a silo. There is not much access given to the devs. Its integration with other apps and other sensors are sub standard as it is not a two way street currently. This is changing.
Apple knew this and that’s why it launched the health app before it launched Apple Watch. The health app enables all these interactions and will be empowering more such interactions going forward. This trend is evident by Apple’s latest move of launching native SDKs for the Apple Watch, which will gives devs more access to the Watch’s features and sensors.
Once this happens, it will make sense to have the same operating systems as smartphones as this will make it possible to have the best integration. Moreover, because these two ecosystems have the most active developer base. So, the market is going to be divided pre-dominantly into fitness wearables that support either or both Apple’s iOS and Google’s Android.
So, the fitness wearable market will be commodified. There will be not much product differentiation possible. Only exception to this would be Apple Watch. This is because, Apple will ensure there is superior integration between iDevices and Apple Watch, which will help differentiating its offering.
All other wearables will have a similar fate as Android smartphones manufacturers. They will have low margins because of intense competition, low switching cost and no significant product differentiation.
Once this happens, it will not be able to maintain 68% market share. And it will be increasingly challenging to win and retain customers. Even if Fitbit survives this shift in the wearable market, its gross profit margins will fall from its current level of around 50%.
I love wearing my Fitbit, but its best days are behind it.
Giving credit, where credit is due
I believe in retrospect Fitbit’s IPO will not be seen short of a Wall Street Masterpiece. Kudos to FitBit’s management team and the Bankers leading the deal — Morgan Stanley, Deutsche Bank and BofA Merrill Lynch.
The timing of the IPO could not be better. Apple Watch has hit the market and validated the wearable market. However, it hasn’t gained as much traction as to cast doubt on Fitbit’s future.
Fitbit has had a tremendous run and right now the growth potential, on the face if it, seems promising. It is no wonder they raised their offering price thrice and the final price is 33% higher than the mid-point of the initial price band.
Final Words
Will the share price go up in initial trading, I have no doubt that it will. Will it perform well over the next few months, most likely. Like any successful product, the traction it has achieved is sticky but it will not last too long. In my opinion, within the next two years, it will no longer be a market leader. It will be quite a feat if it finds itself among the top 3.