Is the FitBit IPO Valuation Justified?

FitBit IPO ValuationWearable technology has been around for eons; the most popular form of which have been watches. And for the near future, smartwatches will continue to be the most popular. While the “Apple Watch” has garnered much of the attention as of late, the fast-approaching Fitbit IPO is casting a long shadow of dominance.

Also Read: Fitbit IPO: 5 Reasons Warren Buffett Wouldn’t Invest in It

Is Fitbit a Heartbeat Away from a $3.5-Billion Valuation?

With the stock market generally being viewed as seriously overvalued, income-starved investors have been jumping all over the IPO bandwagon. Some have paid off; many haven’t.

That hasn’t stopped investors’ hearts from racing at the prospect of getting in on the Fitbit IPO in the coming weeks. Fitbit expects to IPO on the New York Stock Exchange under the ticker symbol, “FIT.”

The company, which develops wearable devices that track people’s fitness activity, expects to issue 29.8 million shares in the range of $14.00 to $16.00 per share; this would value the company at around $3.5 billion. But chances are good that the Fitbit IPO will surpass this level.

Founded in 2007, Fitbit is the dominant maker of fitness tracking information in the U.S. with a 68% share of the U.S. fitness activity tracker market by dollars. The company’s products can measure the number of steps you take, heart rate, calories burned, quality of sleep, and other personal metrics. The data is then gathered and analyzed by software. (Source: sec.gov, IPO filing, www.sec.gov/Archives/edgar/data/1447599/000119312515176980/d875679ds1.htm, May 7, 2015.)

Also Read: Fitbit IPO: Everything You Need to Know

Breathtaking Revenue and Earnings Growth

Compared to many of the non-profitable, newsworthy IPOs over the last number of years, the Fitbit IPO valuation of $3.5 billion seems pretty reasonable. It’s especially reasonable when you consider the company’s tremendous growth.

Is the fitness tracking information business profitable? It is for Fitbit. According to its IPO filing, Fitbit is posting solid earnings and revenue growth. In 2011, Fitbit reported revenue of $14.5 million and a loss of $4.3 million; in 2014, Fitbit had revenue of $745.4 million and earnings of $131.8 million.

Most recently, Fitbit reported revenue for the first quarter of 2015 of $336.8 million and net income of $48.0 million. That’s a huge 210% increase in revenue over the $108.8 million recorded in the first quarter of 2014 and a 440% increase over the $8.9 million in earnings.

The strong increase comes on the heels of improved sales. The number of devices sold grew from 200,000 in 2011 to 10.9 million in 2014. And the future continues to look bright for Fitbit; during the first quarter of 2015, the company sold 3.9 million devices, a 140% increase over the 1.6 million sold in the first three months of 2014.

If earnings and revenue growth are important, perhaps Fitbit should be on your radar.

Also Read: Fitbit IPO: What it Means for Investors

Is Fitbit a Marathon or a Sprint?

Can Fitbit keep this tremendous pace up, or is it sprinting to the finish line? It would be difficult to argue that fitness is just a fad. And you can’t really say that mobile computing is on the way of the 8-track.

Fitbit has a strong foothold in a lucrative niche market. And Fitbit isn’t standing still either. The company continues to roll out new models with advanced features including social media tools, analytics, and virtual coaching, among others. The company also has attractive price points from $60.00 to $250.00. The Apple Watch, on the other hand, has an entry price of $350.00.

In addition to different models, the company also offers various premium subscriptions, including “Fitbit Premium” ($49.99 per year) and “FitStar” ($39.99 annually). No doubt, Fitbit will create additional services to offer customers, businesses, and partners in the future.

The key issue is whether Fitbit can build enough of a sustainable following to ensure it doesn’t come second to other wearable technologies. Otherwise, it simply risks falling to the wayside. The Fitbit mobile app advises people to “Be More Active; Eat Better Food, Watch Your Weight, Get Better Sleep.”

That’s a tall order. Can wearing Fitbit really help improve life? And will people be forever empowered to wear it? One stat shows that 15% of Fitbit users disconnected within the first 30 days of use. And 42% of people stop wearing fitness trackers after six months. (Source: Forbes.com, “Fitbit Has A Problem — And It Isn’t Apple Watch.” May 7, 2015; www.forbes.com/sites/dandiamond/2015/05/07/fitbit-has-a-problem-and-it-isnt-apple/.)

To stay successful and dominate the wearable fitness tracking market, Fitbit will need to be like every other business; attract new customers and continuously evolve. And with a dearth of interesting IPOs so far this year, the Fitbit IPO could be one of the most interesting plays in 2015.