Wall Street released a deluge of positive reports about Fitbit on Monday, as the quiet period following its June IPO was lifted, giving the stock a boost.
Fitbit, which makes wearable fitness trackers, is dominating a fast-growing space. The company lays claim to a whopping 85% of the U.S. market, up from 59% just two years ago.
Fitbit is a “brand that has become synonymous with the category,” writes PiperJaffray analyst Erinn Murphy. In other words, it has become the Kleenex of fitness trackers.
Analysts are excited about Fitbit’s ability to continue capitalizing on the wearables space, which is hot and getting hotter. Consumer spending is growing faster on these devices than on any other consumer electronics gadgets out there, according to IDC.
“While some investors argue wearables are a niche or fad, our work suggests penetration is approaching levels enjoyed by notebooks in the US and will increase over the next year,” writes Morgan Stanley analyst Katy Huberty.
Here’s what Wall Street is so rosy on:
Fitbit looks poised for long-term growth
Fitbit has room to run, agree analysts, who love that the consumer brand is so well-known. For instance, the company can do more with corporate wellness programs subsidized by employers. Right now, Fitbit gleans just 7% of sales from such programs.
It can also look to international markets to drive growth. It’s already the global leader in the wearables space, with 34% market share, but international markets remain largely untapped. “The bottom line is that very few consumers own fitness trackers to date,” writes Deutsche Bank analyst Ross Sandler. He figures that even 5% penetration in developed markets and 2% penetration in emerging markets would trigger demand for nearly 31 million fitness bands. (Last year, Fitbit sold 10 million devices.)
Plus, product innovation should help fuel growth.
“We believe devices are just one part of the Fitbit story – the part that is immediately visible and has been the growth driver to date,” writes SunTrust analyst Robert Peck, who notes that Fitbit has the potential to expand into fitness-oriented services that complement its physical trackers. Fitbit could become a “one-stop hardware/service solution to peoples’ health and fitness concerns,” he posits.
Deutsche Bank’s Sandler goes even farther, envisioning a Fitbit that goes beyond health and fitness: “There is no reason why your Fitbit device (in the future) couldn’t display email and text messages, turn on the lights to your home, unlock your car, and many other basic life-improving functions – in addition to tracking your health stats.”
Apple Watch is not a death sentence
The Apple Watch has gotten a lot of buzz and is frequently cited as a key threat to Fitbit. But while attention is great, buying is better. People are three times more likely to hear about Fitbit and actually go out and purchase one than they are an Apple Watch, according to a SunTrust survey.
This could change, some analysts point out, when the next generation of Apple Watch comes out and it becomes easier to buy.
Still, there are key distinctions between the two devices and who wants to buy them. For instance, Fitbit is cheaper and therefore accessible to more people. It also has a much longer battery life (it’s hard to monitor your sleeping if you have to charge your device every night) and you don’t have to own an iPhone to use it, like you do with an Apple Watch.
Morgan Stanley’s Huberty sums it up like this: “Apple is too big and Fitbit share too high to not assume some share loss but overlap will be limited by different price points and features.”
It’s actually making money
The San Francisco-based company swung to a profit last year, earning $132 million on revenue of more than $745 million. It has been helped by the rapid popularity of its fitness trackers: Last year it sold 10.9 million devices, more than double the 4.5 million devices it sold in 2013.
These financials are “robust,” says SunTrust’s Peck, who points to Fitbit’s strong revenue growth rate (up 150% in 2014) and gross margins (45-50%). He sees $140 million in profit this year on revenues of $1.4 billion.
Fitbit has drawn comparison to consumer growth stocks like Under Armour UA +3.61% and GoPro from several analysts. It has “superior growth metrics to-date,” writes PiperJaffray, and combines “a powerful consumer brand with technology.” Its stock is also trading at similar levels to other consumer growth stocks in the post-IPO period.
When Fitbit made its public debut last month, the stock gained nearly 50% on its first day of trading to close at $29.68 per share. Since then, it has gained 110% from its IPO price to $42 per share. Share were up another 5% to $44.24 on Monday.
Written by Lauren Gensler of Forbes