According to the filing submitted to the Securities and Exchange Commission (SEC), Fitbit’s IPO price is between $14.00 and $16.00 a share. The company plans to issue 22.4 million shares so the IPO would raise $358 million. Fitbit stocks would be listed on the New York Stock Exchange (NYSE) under the ticker symbol “FIT.” Fitbit’s IPO date is yet to be announced. (Source: Securities and Exchange Commission, June 2, 2015.)
Despite solid revenue growth, there is uncertainty in Fitbit’s financials.
Net loss was declining at first, from a loss of $4.3 million in 2011 to $4.2 million in 2012. However, in 2013, the company had a staggering $51.6 million net loss. The main reason was a product recall in March 2014 which impacted results for the fourth quarter of fiscal 2013.
The product was the “Fitbit Force,” one of the company’s fitness trackers. Users have reported allergic reactions including skin irritation, rashes, and blistering. Since the recall, Fitbit has been exposed to U.S. Consumer Product Safety Commission proceedings and private litigation. Such disruption to the company’s business operations would require significant management attention and pose adverse effects on Fitbit’s financials. Mr. Buffett would not invest if such uncertainty remains.
2. Does it Really Work?
After all the hype, a product has to work.
It was reported that 15% of Fitbit users disconnected within the first 30 days, and 42% of people stopped wearing fitness trackers after six months. The main reason is the device’s capability to produce health gains for the users. Those that are already fit find themselves not needing Fitbit’s fitness tracker to stay active. Those that weren’t active find Fitbit’s goal of 10,000 steps frustrating and quickly forgot to wear it. (Source: Forbes, May 7, 2015.)
If a product cannot produce the results it is supposed to deliver, its growth potential will be very limited. If all the growth comes from new curious consumers who haven’t tried the product, growth will fade away when consumers finally realize they don’t need it in the first place.
3. Lack of Durable Competitive Advantage
At the end of the day, what does Fitbit offer that its competitors don’t?
Nowadays, making a fitness tracking device is not rocket science. Many companies have been making them, and many more are joining the game. Garmin Ltd. (NASDAQ/GRMN), Samsung, and Jawbone have been offering a variety of fitness trackers for a while now. Apple Inc. (NASDAQ/AAPL) recently introduced the Apple Watch that can also function as a fitness device. Microsoft Corporation (NASDAQ/MSFT) is also joining the game with the Microsoft Band.
Despite its surging sales, Fitbit’s market share actually declined in the first quarter of 2015. A report by IDC suggests that in Q1 2014, Fitbit had 44.7% of the market. A year later, the company’s market share dropped to 34.2%. (Source: IDC, June 3, 2015.)
By not having a durable competitive advantage, Fitbit’s initial success could be copied and taken away by its competitors.
4. Difficulty in Global Expansion
Fitbit is the largest producer of fitness tracking devices in the U.S. by dollars. However, its expansion overseas could see serious roadblocks.
The biggest threat to Fitbit comes from the Chinese company Xiaomi Inc., known for making cell phones. This time last year, Xiaomi was not even in the fitness tracker business. However, since the launch of its ultra-cheap $14.99 “Mi Band” last summer, Xiaomi has gained an enormous following for this fitness tracking device. In Q1 2015, the company shipped 2.8 million units of “Mi Band,” capturing 24.6% of the market.
Fitbit has limited control over its third-party suppliers, contract manufacturers, and logistics providers. In its global expansion, Fitbit will be facing tough competition from low-cost producers from emerging economies.
5. Not Buffett’s Type
Last but not least, Fitbit does not fit with Warren Buffett’s value investment strategy. Mr. Buffett believes in Ben Graham’s value investing paradigm. He prefers to invest in established companies with low risk and predictable future earnings. Buffett derives a company’s intrinsic value by discounting future earnings back to the present.
Fitbit is a company that just turned profitable last year. It does not have an established track record of success, and its future is filled with uncertainty. Moreover, Fitbit says in the SEC filing that it does not intend to pay dividends for the foreseeable future.
Bottom line: Fitbit is an interesting business, but I don’t expect the Oracle of Omaha will be taking out his check book this time.