Wearable Technology: Should You Buy Fitbit Inc. (NYSE:FIT)?

Wearable Technology StocksWearable technology stocks have gained a lot of popularity in 2015. Fitbit Inc.’s (NYSE/FIT) stock price surged more than 59% since its initial public offering (IPO) on June 18th. Apple Inc.’s (NASDAQ/AAPL) new smart watch has also drawn a solid following. When it comes to investing, however, investors should stay calm. The wearable technology boom is mostly hype.

Competitive Advantage

If you take a look at what it takes to make products in the wearable technology category, you will see that a lot of the companies that make them do not have much in terms of competitive advantage.

Take Fitbit as an example. The company has been the biggest player in the fitness tracker industry. In the first quarter of 2014, it captured 44.7% of the market. One year down the road, the company only had 34.2% of the market. Part of the loss in market share was due to the new entrant—Chinese cell phone maker Xiaomi Inc. This time last year, Xiaomi wasn’t even in the fitness tracker industry. But since the introduction of its ultra cheap $14.99 “Mi Band,” Xiaomi gained an enormous following for its product. By the first quarter of 2015, Xiaomi captured 24.6% of the market. (Source: IDC, June 3, 2015.)

What this shows is that even the biggest player does not have a wide enough economic moat—a word coined by billionaire investor Warren Buffett. An economic moat refers to a company’s durable competitive advantage that can protect its profit from being taken away by competitors. One reason for Buffett’s success is that he stuck with companies with wide economic moats. If Fitbit’s market share can be taken away, so can its profit.

Moreover, some of the products that are classified as wearable technology are just wearable, but not technology. Therefore their success is even easier to copy. Take Google Cardboard, for instance. Last year, the search engine giant launched the Cardboard, a virtual reality headset. The device is made from $25.00 worth of parts; including plastic lenses, rubber bands, magnets, and cardboard. Needless to say, Google’s Cardboard is not in a safe position, as there has been a flush of DIY virtual reality headsets coming to the market, some of which you can get for as low as $6.00 online.

Also Read: Top Wearable Technology Companies to Watch in 2015

Product Safety Risks

Some fitness tracking devices and smart watches have been reported to cause irritations and allergic reactions.

Fitbit conducted a product recall in March 2014. The product was the “Fitbit Force,” one of the company’s fitness trackers. Users have reported allergic reactions like skin irritation, rashes, and blistering. The recall has exposed Fitbit to U.S. Consumer Product Safety Commission proceedings and private litigation.

Despite having probably the largest fan base among all technology firms, Apple is not immune to consumers’ allergic reaction to the Apple Watch. Since its launch, some users have reported having a red rash after they wore the device. (Source: International Business Times, May 6, 2015.)

Investors should know that such disruptions would require significant management attention from the company. Moreover, recalls and litigations could pose substantial adverse effects on financials.

Also Read: Fitbit (FIT): Not Top Amongst Wearable Technology Stocks

Does it Work?

At the end of the day, a product has to work. Let’s look at one of the most popular products in wearable technology—fitness trackers.

It was reported that 15% of Fitbit users disconnected within the first 30 days. Moreover, 42% of people stopped wearing fitness trackers after six months. The main reason comes from the device’s capability to produce health gains for users. Those that are already fit find themselves not needing Fitbit’s fitness tracker to stay active. Those that weren’t active found Fitbit’s goal of 10,000 steps per day frustrating and quickly forgot to wear it. (Source: Forbes, May 7, 2015.)

Add it up and you’ll see what all of this means; there is no denying that wearable technology could one day improve our way of life. But right now, investors should keep in mind that the fundamentals for a lot of these products are not sound, and the future of wearable technology stocks remains highly uncertain.