Shares of Fitbit (FIT, Financial) plunged more 25% last week, and the company continues to face the inevitable threat of Apple (AAPL, Financial) Watch.
The fitness tracker manufacturer spooked its investors after the market closed by forecasting weaker-than-expected second quarter income, suggesting its wearable business will grow at a much slower pace than its stock price once implied.
It didn't matter that the company's first-quarter results beat on both profits and revenue. At the moment, Fitbit appears to have run out of ideas to deal with Apple. Fitbit shares have been on a downward trend for the last few quarters.
Fitbit is known for its products of the same name, which are activity and quality of sleep trackers. They are wireless-enabled wearable technology devices that measure data such as the number of steps walked, heart rate, steps climbed, quality of sleep and other personal metrics. The first of these devices to hit the market was the Fitbit Tracker.
A few years ago, Fitbit devices were viewed as one-of-a-kind technology that could dominate the wearable devices market in the future, but since then many players have come into the market including giant technology companies that have massive cash flows at their disposal.
For instance, Apple introduced Apple Watch two years ago and now the device is deemed to be Fitbit’s biggest rival, especially in North America. Apple Watch integrates fitness tracking and health-oriented capabilities with iOS and other Apple products and services.
Apple Watch also relies on a wirelessly connected iPhone to carry out many of its default functions like texting and calling. The Apple Watch quickly became the best-selling wearable device last year with the shipment of 4.2 million smart watches in the second quarter of 2015.
Fitbit has now witnessed a 54% decline in its market value over the past year. And now its shares trade some 32% below their IPO price of $20. The bulk of Fitbit's decline has occurred since Apple launched Apple Watch.
Its shares are now on what appears to be a vicious downward trend, driven by investors' panic that its leadership position has started to be eroded by not only the arrival of Apple Watch but also the threat posed by other tech giants like Samsung (SSNLF, Financial), Microsoft Corporation (MSFT, Financial), Garmin Ltd. (GRMN, Financial) and others in this area. Fitbit’s second quarter guidance only served to fuel those fears.
Fitbit expects second-quarter EPS to be in the range of 8 cents to 11 cents per share, which widely misses Wall Street's forecast of 26 cents per share. If Fitbit earns 11 cents, this would be nearly a 60% decline compared to analysts' forecasts from just a month ago.
Wall Street is optimistic that Fitbit's income will rise 38% for the current fiscal year, which ends in December while projections for the next fiscal year estimate a 17% increase. And while those income growth projections may seem respectable, Fitbit will be forced to spend considerably to stay ahead of the competition, which in turn means its profits could be under pressure for at least 12 to 18 months.
Conclusion
Fitbit still appears to have significant long-term potential. However, it certainly faces a myriad of challenges with the biggest one coming from Apple.
In addition, the company’s goal of global expansion will increase expenses while other obstacles related to moving to international markets will also hit the company.
Considering all factors, Fitbit has no proper game plan for Apple Watch or any of its several giant rivals, but the most important thing now is to focus on how to remain in the game even as it looks certain to lose leadership in fitness devices.
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