Fitbit: Why The Risk Of Market Commoditization Is Overblown
It would be easier to pick a stock that could double its price in one year than to read about Fitbit (NYSE: FIT) stock without reading – for the umpteenth time – how it is performing woefully this year.
Indeed, Fitbit stock is down by about 50% so far this year on back of worries regarding the future of the company. Put simply, fears lurk around the investment sphere that Fitbit’s products can be easily commoditized.
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Its shrinking lead in the wearables market has not been helping to allay such fears. IDC estimated that FIT had about 25% of the wearables market as of the end of the first quarter. FIT had 33% of the wearables market as of end of 2015 first quarter. All of these have driven short interest in FIT stock up by roughly 82% year-to-date. Even GoPro (NASDAQ: GPRO), whose situation helped fuel fears about market commoditization, have never seen such widespread bearish sentiment.
However, here’s why investors shouldn’t be so worried.
Risk of Losing Leading Market Share Is Overblown
As referenced above, fears of market commoditization has contributed a great deal to the crippled condition of Fitbit stock. Apart from commoditization, though, the entrance of Apple (NASDAQ: AAPL) into the wearables market through the Apple Watch also added to the worries, as investors fear that Apple is big enough to outmuscle Fitbit stock in no time. However, the bears are missing some advantages that FIT stock has going for it.
First, even though the wearables market is sincerely prone to commoditization, Fitbit’s focus on health makes a whole lot of difference. For instance, in the corporate world, where Fitbit stock is trying to help companies up their employees’ health through its corporate wellness program, it is in unlikely that corporate bodies would think, “There are cheaper options out there, why not go for those?” And by cheaper options, I mean similar wearables produced by solopreneurs who just want to have a slice of the market. Corporate bodies would rather stick with a name they know and can hold responsible or trust for quick help especially since health is involved, according to Starling Capital. Moreover, the bears are missing that point that the first-mover advantage exists for any company that offers products and services tied to healthcare.
To make things more practical, consider the smartphone mobile market. This market has been commoditized. One just needs to look at the developing world, where smartphones cost less than $100 on the average, to understand. But that didn’t not make leaders like Apple and Samsung (OTCMKTS: SSNLF) less relevant. That’s because they simply offer more than just selling phone.
In the same vein, market commoditization won’t drive Fitbit into oblivion overnight because, like Apple and Samsung, it just doesn’t make wearables. It has bundled services that gives it more value proposition than the average commoditizer. Moreover, it has more cash and investor support to withstand a market commoditization.
So while, market commoditization would obviously limit the extent to which Fitbit can penetrate the market, it is still well positioned to stay on top. In addition, investors have to bear in mind that Fitbit’s fitness wearables market is still very much in a nascent stage. As the market grows, Fitbit will surely get bigger.
With Fitbit in a good position to grow its revenue by 35% this year, following a 100%-plus increase in 2015, investors just have to see the current depression in Fitbit stock as a buying opportunity. Moreover, its valuation looks good, with its one-year forward PE ratio standing at 10.40, which is better than bigger competitor, Apple’s, one-year forward PE of 11.96. Contrary to what the bears wants to have us believe, Fitbit stock reeks of value.