Wearable Technology: Is Fitbit Inc. (NYSE:FIT) Really a $10 Stock?

FitbitFitbit Inc.’s (NYSE:FIT) stock price plunged quite a bit recently. Since its August high of $51.64, Fitbit’s share price has been down 38% to today’s $32.04. However, there might be something that could inject some bullishness into this wearable tech company.

Bloomberg reported that pharmaceutical companies started to give Fitbit’s fitness trackers to patients during clinical trials. By fitting trial participants with Fitbits, the pharmaceutical companies could get more precise information and better understanding of whether their drugs work. Data from Fitbit’s devices would be more accurate than subjective questionnaires. (Source: Bloomberg, September 14, 2015.)

Before we move on to how this would affect Fitbit, let’s take a look at what’s been going on in the wearable tech industry.

Wearable Technology: Mostly Hype?

As I said in July, the boom in wearable tech was mostly hype. The idea is simple: for a company to succeed, it has to have some levels of competitive advantage. And so far, not many wearable tech companies are showing that.

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Looking at Fitbit, the problem is particularly serious. Despite being the largest vendor of wearables, the company’s market share has been shrinking. In the second quarter of 2014, the company captured 30.4% of the market. Fast forward to the second quarter of this year, Fitbit’s market share declined to 24.3%. (Source: International Data Corporation, last accessed September 14, 2015.)

The lack of competitive advantage is also reflected in its declining margins. According to its most recent earnings report, the company’s gross margin deteriorated five percentage points from 52% to 47%. (Source: Fitbit Inc., last accessed September 14, 2015.)

One company that caused the change in the wearable market was Apple Inc. (NASDAQ:AAPL). In the second quarter of 2015, the company made its first move into the wearable tech sector with the Apple Watch and immediately became the industry’s second-largest player by shipment volume, capturing 19.9% of the market.

The IDC report noted that Apple “is just getting started with its Watch,” and had only reached sixteen geographic markets. The company had just started agreements with third-party retailers. Moreover, the next generation of Apple’s watch OS would allow for native applications, “which could have a similar effect that iPhones enjoyed when native apps became available.”

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Mind you, Apple is not the only threat that Fitbit is facing, as Chinese cell phone maker Xiaomi Inc. has joined the game too. Xiaomi wasn’t even making fitness tracking devices in the second quarter last year. Fast forward one year, Xiaomi was shipping 3.1 million units, capturing 17.1% of the market in the second quarter.

The company’s success relied partly on its huge following among its smartphone users, but also benefited from its low pricing: Xiaomi’s fitness tracker “Mi Band” starts at $14.99. Note that the company achieved its growth with limited distribution channels overseas. If the “Mi Band” becomes available in global markets, the competition would be even more intense.

All of these problems are big headwinds for Fitbit. So much so, in fact, that Global Equities analyst Trip Chowdhry is asking whether the company is a $10.00 or $12.00 stock. (Source: What’s a fair price for Fitbit stock: $10 or $58? Investor’s Business Daily, September 9, 2015.)

So, will its usage by the pharmaceutical companies save Fitbit?

Well, the use of fitness trackers in the health industry will address at least one problem for Fitbit—its lack of usage. You see, it was reported that 15% of Fitbit users disconnect within the first 30 days. Moreover, 42% of people stopped wearing fitness trackers after six months. The main reason comes from its capability, or the lack of it, to produce results. 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, last accessed September 14, 2015.)

Still, being used by pharmaceutical companies is good news for Fitbit. However large the adoption could be, and how it would contribute to Fitbit’s growth, remain uncertain. Moreover, Google Inc. (NASDAQ:GOOGL, GOOG) is developing a research-grade fitness band that could be used in clinical trials and drug tests. Looks like competition is getting intense everywhere, Fitbit better step up its game before it’s too late.

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