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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

Fitbit: Citron’s Faith Is Misplaced

Smart-bands don’t make economic sense for health care monitoring as patients already have smartphones to track the activity

June 12, 2018 | About:

Fitbit (NYSE:FIT) was flying high yesterday as the infamous short seller Citron Research cheered for the company, making a case for a $15 stock price in a report released recently. The market turned ecstatic, bidding Fitbit up more than 14% by market close on Monday.

Andrew Left, the CEO of Citron Research, argued that Fitbit is positioned to benefit from the health care monitoring market, rather than the consumer wristband market.

“Fit has the ability to become one of the most important med-tech [medical oriented technology] companies out there; and that’s not my opinion, that also if you saw when the FDA granted a handful of companies the approval to fast track items that will lead the med-tech revolution, one of them was, in fact, Fitbit,” Left said in an interview with Bloomberg.

Citron said he believes that Fitbit is well-positioned to tap into the wearable health care market amid its focus on R&D spending during the last few years. Fitbit spent 36% of its revenue on R&D during the first quarter of 2018, as opposed to 29% during the same quarter last year.

Other bull arguments from the research firm include Fitbit’s potential to tap into diabetes tracking and glucose monitoring, and the efforts of the company in monitoring heart disease patients.

Financials look bleak

Fitbit is not making a lot of money. The company had a staggering net loss of $80.9 million during the first quarter of 2018. Fitbit is also struggling to post revenue growth. Revenue declined 17% year-over-year to $247 million during the first quarter of 2018; sequential decline in revenue amounted to more than 50% during the first quarter. However, this can be attributed to cyclicality as the same decline was witnessed during the first quarter of 2017.


Nonetheless, the company managed to post positive operating cash flow during the full year 2017 and the first quarter of 2018. The cash balance increased $37 million during the first quarter, rising to $378 million as of March 2018.

In short, the current downward trend in the top-line financials and loss-making ability of the company doesn’t foster confidence in the bull thesis.

Is there a market for wearables and smart-bands?

Apple (NASDAQ:AAPL) is currently sitting at the top of the wearable market that grew 10.3% during 2017, according to IDC. A total of 115 million wearables were shipped during the year ended 2017. However, the surge is slowing down as shipments were meager compared to the 26% growth in the market during 2016. Nonetheless, the market is expected to recover as original equipment manufacturers (OEMs) launch new models. IDC expects a 26% CAGR in the wearables market during 2017 to 2021.

It can be seen in the chart above that Fitbit is falling behind as Apple took the lead in the fourth quarter. Moreover, the market is fragmented with the highest chunk shared between numerous suppliers. However, the trend is changing as Apple has started to gain market share towards the end of the fourth quarter of 2017.

In short, consolidating position of Apple and saturated market is a not a good recipe for Fitbit’s growth prospects, at least in the consumer market. That’s why the company is pivoting towards digital healthcare by entering into partnership with health care players like Dexcom and getting a place in FDA’s precertification program.

Is there a market for healthcare wearables?

ABI Research forecasts the healthcare wearables market to reach $10 billion by 2022, at a CAGR of 8%. The forecast covers wearable devices like fitness trackers and wearable sensors, among others. Another research outlet, however, sees a double-digit growth in the health care-related wearables between 2017 and 2025. All in all, health care wearables might grow in double digits during the next few years, in line with the consumer wearables market.

Fitbit and the FDA pre-certification program

Although the FDA partnership will create opportunities for Fitbit in the digital health market as proposed by Left, the fact that Apple and Samsung (SSNLF) are also a part of the same FDA program will make life difficult for Fitbit. Apple already has the lead in the smart-watch market. With its digital health care push, Apple is in a much better position to tap the health care market in developed economies like North America. Apple commands more than 44% of the smartphone market share in the U.S. followed by Samsung at around 28%.

The point is that it’s easier for smartphone manufacturers to get their smart bands in the hands of consumers, which makes their products an attractive proposition for the digital health services providers. Moreover, Fitbit can’t compete with the R&D spend of Apple or Samsung. A digital health-band from Apple or Samsung is more likely to attract the attention of the health care market. In short, the comments of Citron Research should be taken with a grain of skepticism.

Fitbit and the Dexcom partnership

While making the case for Fitbit, Citron argues that the diabetes market, with 27 million patients, is untapped as far as the continuous monitoring of glucose goes. Fitbit is expected to benefit from the market due to its partnership with Dexcom – the only FDA approved provider of continuous glucose monitoring tools. However, Citron ignores the fact that a smart band isn’t necessary to monitor glucose continuously. A patient can also monitor it using a smart phone, as the under-the-skin sensor from Dexcom has the ability to send the data to iOS and Android smartphones.

The thing is it won’t make much sense for patients to invest in smart-bands when vitals can be monitored on a smartphone. The only exception is for a smart band that requires no additional sensor for monitoring, like in the case of a heart rate monitor.

Moreover, it’s not like the glucose sensors market is growing exponentially. IHS noted that the market for glucose monitoring sensors will grow at a CAGR of 4% during 2016 to 2020, which is frankly not very high. The comments of Citron regarding the Dexcom partnership paint a rather rosy picture for Fitbit.

Final thoughts

Citron Research’s comment on Fitbit seems to be rather ambitious. Quite frankly, the whole report gives a feel of an infomercial, rather than an investment thesis.

Citron is relying too much on healthcare wearables market for its upside thesis on Fitbit. The healthcare reality check shows that market is expected to witness moderate growth with big players like Apple and Samsung to fight for market share.

Moreover, smart-bands might be redundant in health care as it doesn’t make economic sense for a patient to invest in a smart band when monitoring can be done with smartphones.

In conclusion, Fitbit is a risky bet given declining sales, increasing competition and a very rich valuation; investors shouldn’t just rely on the healthcare market for an investment in Fitbit.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

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