FitBit (FIT) follow up: Enough upside to justify the risk ?

DISCLAIMER
This is not investment advice. Please do your own research and don’t follow any anonymous bloggers.

Let’s continue with this nice “anti Buffett” stock from my post last week.

The people / founders

FitBit’s original founders from 2007, James Park and Eric Friedman are still on board.

Interestingly, although both ar only 41 years old, FitBit was the third company they founded together.

The other companies were Windup Labs, a photo sharing company they sold in 2005 and Epesi, a B2B software company that didn’t work out.

Park:

park

Friedman:

friedman

Both founders among them own 100% of the B shares which have all the voting rights. Park owns around 14,6 mn B shares, Friedman has slightly more with 16,3 mn and has technically the voting majority.

Both founders did sell some shares after the IPO in 2015 but didn’t sell any significant portion since early 2016. One interesting aspect from the 2017 proxy filing:

Base Salaries — In early 2017, our CEO and Chief Technology Officer announced that they would each voluntarily reduce their base salaries for 2017 to $1.00, as an acknowledgment of our financial performance in 2016 and of the challenges ahead in 2017. In 2017, we also increased the salaries of our General Counsel (in early 2017 and again in July 2017) and Chief Financial Officer (in July 2017) as a retention mechanism and also to reflect appropriate levels of fixed compensation for executive officers with commensurate responsibilities in our peer group.

That’s an interesting move: Cutting their own salaries but increasing those of the people they want to retain. However, the Co_founder did not go home empty-handed in 2017. Park received a performance based bonus of 1,5 mn and Friedman around half of this.

Not small change but pretty low compared to other Tech CEOs and an indication that they rather think as “owners” than as managers.

Top management additionally gets a combination of stock options/RSUs as part of their package which especially for the non-founders is the most significant part of the payment package.

The Performance measures for the bonuses as such (Sales, EBITDA, management objectives) are not optimal, but I think in combination with the founder’s significant holdings overall OK.

Back to business

As mentioned in the initial post, the “gadget” business as such is currently shrinking, although the new Versa seems to sell quite nice ( 3 out of 10 top sellers in Smartwatches on Amazon.com are Versa watches).

So FitBit wants to “pivot” into a “digital health platform”. Now the big question is: Is this just some kind of PR BS or could this be something real ? In February this year, Fitbit acquired a company called Twine Health.,

Twine a start-up that provides  a cloud based platform that connects chronically ill people with health and fitness coaches. Twine seems to be now an important part of the FitBit offering to Health plans such as Humana or Life Insurers such as John Hancock.

For FitBit, acquiring Twine and potentially other similar smaller companies could make a lot of sense: FitBit has the brand to onboard large players like Humana and John Hancock, which is something small start-ups often fail to achieve.  It need to be seen how many people then actually use this services, but the potential is clearly there.

One huge tailwind for FitBit’s corporate health platform could be the fact, that just a few days ago, the U.S. Preventive Services Task Force made the following recommendation:

Conclusions and Recommendation  The USPSTF recommends that clinicians offer or refer adults with a body mass index of 30 or higher to intensive, multicomponent behavioral interventions. (B recommendation)

Who is this USPSTF and is it significant ? Well, it seems to be VERY significant as their recommendations seem to be the basis for coverage of health plans. According to this article for instance it is clearly lined out that US health plans HAVE TO COVER treatments if they get an A or B rating from USPSTF.

“Multicomponent behavioural intervention” in plain words means mostly more exercise and better nutrition.

So clearly FitBit’s new strategy seems to fit this probably huge new field. According to the USPSTF article, around 35-40% of the population in the US is considered obese under this definition. So the market is potentially huge.

Clearly a lot of other players will try to enter this market but I do think that FitBit has some advantages, such as their brand and their long experience with fitness data.

The Fitbit Versa 

As I promised last week, I spared no expenses and got myself a nice Black Versa:

20181004_220932

This is clearly no objective comparison test but these are the things I liked about the Versa:

  • the watch looks nice (similar to an Apple Watch but not like a cheap knock off)
  • it’s easy to install and use
  • it has a long battery life (5 days or more)

I did have a Samsung Gear 2 and it was quite annoying having to charge every night.

Compared to an Apple Watch it lacks a couple of features (GPS, direct 4G etc.) but is significantly cheaper (180 EUR vs 400 EUR for an Apple watch) and if you want to track your activity, it owrks very well.

Back to FitBit as an Investment

Clearly, FitBit is not a “Buffett” investment, neither the early, nor middle or “late Buffett”. However I think that the stock is still interesting:

  • due to the cash buffer, Fitbit will not go out of business soon (according to the CEO they plan to be cash neutral for 2018)
  •  the gadget business as such is not that interesting, however the user base and the brand name clearly have some value
  • although the “Pivot” into a corporate health platform is at an early stage I do think they have a chance to play a role in this potentially huge and growing market
  • if the founders would decide to sell now, I think the price for a take over would be significantly higher than the current stock price. Theoretically FitBit could be an interesting target for players like Microsoft, Google or even Amazon who want a quick entry into the corporate health care sector
  • Short term there could be some positive surprise if the Versa sells better than expected

There are clearly many negatives, such as

  • negative sales and stock price momentum
  • risk of higher than planned cash burn
  • failure of achieving any significant sales with the new health platform

So there is clearly no traditional “margin of safety”, however I do think that despite the risk, the risk /return relationship is quite attractive. Plus, I do like the fact that the risk is more “company specific”.

One fun fact: Most sell side analysts are very negative, funnily enough, the notoriuos short seller Citron Research was very positive on Fitbit some months ago. However the “research” is quite shallow.

Nevertheless, I am initiating a 1% position in Fitbit at exactly 5,00 USD/share into my “opportunistic” bucket.

Why so small ? Because the stock  is clearly risky and volatile (Beta ~1,2 vs. Nasdaq) and I would want to see some traction in the platform business before I would increase the position and of course some kind of stabilization in the gadget business.

DISCLAIMER
This is not investment advice. Please do your own research and don’t follow any anonymous bloggers.

 

 

 

 

 

 

 

 

Eric N. Friedman interview:

 

 

 

 

 

23 comments

  • As you mentioned, the gadget business is bad – if you don’t happen to be Apple.
    Low margins, faddish, tough competition on variants, quality and price.
    The ida of FitBit itself was a good one and the design is great

    Regarding the health platform, that sounds like marketing bs to me.
    Case in point: do you remember when GoPro decided to become some kind of digital platform (a second Youtube)?
    It didn’t really help or happen.
    If they can actually pull it off and be a partner to the health care industry a few questions arise:
    – who owns the date
    – whos has access
    – data security
    – privacy
    In case they answer these questions, it could be quite an interesting moat. There might be a good reason to build a cloud platform for health data. It seems reasonable that everybody controls their own data and can share it with relevant parties (pharmacies, physicians, hospitals, dietitians, insurers…) as needed. In this day and age there is no reason that your current insurer hoards your data and doesnt make it available to other parties.

    FitBit data offers some leverage to transition into that space but I fail to see that happening for the time being.
    Just the fact that it’s hard to do or my lack of imagination is no reason for thinking they shouldn’t try. It may very well be worth to take on the uncertainty.

    The biggest turn off for me is the hardware/gadget aspect of the company. I might change my mind if there is some tangible progress towards the health cloud.

    Personal note: I don’t wear watches, I don’t know anybody who wears smart watches/FitBits (right now), I know people who own/owned smart watches/FitBits but sold them rather quickly or let them gather dust somwhere.

    ps: sorry for this ranty comment
    pps: I’m always happy to read your posts

    • Thanks for the comment and to be clear I do like differing opinions if they are constrcutive, such are your post.

      A few points: I do know people that (still) wear smart watches or fitness trackers. Not that many but Fitbit claims to have ~25 mn active users which is~0,2% of the worlds population, so one out of 500.

      With regard to data privacy etc: Yes, this is a big issue in Germany but a lot less in the U.S.

      And yes, it’s much more a “venture” investment but I personally think that they do a lot of things very well. I don’t think that what they are doing is pure marketing bS, but we will see how it turns out.

  • Thanks for your views on Fitbit. You mentioned that:

    “The Performance measures for the bonuses as such (Sales, EBITDA, management objectives) are not optimal”.

    What are your preferred performance measures?

    • Management’s (continued) ownership it seems, from reading this post multiple times.
      The author may be referring to a turnaround program without explicitly referring to it: historic numbers are less important in such instance compared to management skill and continued commitment.
      Surely, a special situation and not a conventional growth or value investment if this is the case.
      Sorry for jumping the gun. I know the question was addressed to the author. Just sharing my understanding of the situation…Can you afford to lose 1% of your invested assets? That’s how I treat turnarounds.

      • I would not call it a turnaround as I don’t assume that the devices will become profitable (again). For me ist more a “venture” investment which, at the current stage is clearly VERY risky. I do think the upside compensates for this but i could be of course very wrong.

        • On a separate note, Are you familiar with JOST Werke AG? (i.e. have you ever looked at it?)

        • No, Never heard of this company

        • I am now looking at them – They control important parts of the trucks market (axles, joints and other steel components): they equip 60% of all trucks and 75% of their sales are OEM (directly to manufacturing).
          Sales growing modestly at 11% but underlying is solid. Dividend yield is a small 1.6% at the current share price but there is room to release more cash in the future now that they improved their capital structure.
          I am trying to figure out why the market knows that I dont (we are edging closer to the €27 IPO price of a couple of years ago).

        • Schaffler may be much a better bet. Attractive KPIs, solid background (top 10 wealthiest families in DE), industry leadership, currently invested in new technological development, and very cheap valuation nowadays.

        • Thank you Cardano – I will definitely look into Schaffler.
          I am fairly comfortable with the KPIs of JOST (financial KPIs that is). It is quite a profitable business.
          The risk is that it is directly linked to new automotive sales (Trucks). The last downturn bankrupted the firm – loans were picked up by a consortium led by Cinven and converted to equity subsequently.
          They have since learned their lessons raised a financial covenant-free Schuldschein loan of 150m (senior unsecured I assume). So this is good as a downturn means amend-and-extend instead of foreclosure.
          The question now is regarding the 150m RCF. I am due to talk to IR on monday regarding that (lady is travelling this week). But then again, this has not be drawn down at all as of today.
          I am like this more and more actually….
          Thanks again for the tip.

    • I prefer per share metrics and some kind of return on capital measure.

  • Two comments that you did not address

    1) if Fitbit could be of interest to those internet mogols, why haven’t they reacted yet? Maybe time corrects me…

    2) health insurers will be key in the game (I am surprised the post did not address this 😉 ). …I can only imagine insurers going with their own health apps, and then using iOS / Android devices rather than FitBit.

    You acknowledge not analysing Metro case well enough. Above I just have provided some missing elements for a fair judgement. If I am allowed to add a point: you seem to explore in much more detail the opportunities than the threads.

    If readers provide different views than yours, one should appreciate those and try develop better investment theses, rather than attacking them.

    • I guess you really haven’t read this post. Of course health insurers are key and that’s why both, the recommendation of USPSTF (helath insurers have to pay) and the collaboration with Humana (= large Health insurer) is so interesting.

      Point 2: In April Fitbit started a collaboration with Google;
      https://investor.fitbit.com/press/press-releases/press-release-details/2018/Fitbit-and-Google-Announce-Collaboration-to-Accelerate-Innovation-in-Digital-Health-and-Wearables/default.aspx

      Why hasn’t any of them approached FitBit yet ? I don’t know for sure but currently all the voting rights are with the founders, so an unsolicited take over offer would not work. But again, this is not the investment case.

      I am always open for constructive input, but I prefer to discuss with people who actually bother to read a post. A good consructive comment for instance would have been: “Are you sure that they actually make any money with the Humana cooperation”. The honest answer would be “No, I don’t know. They haven’t disclosed anything”.

      So if you don’t like my posts because they are too positve or sjip the risks, then there is an easy solution: Don’t read them.

  • Nach langer Zeit mal wieder ein Kommentar von mir. Interessante Story!. Wenn Fitbit es tatsächlich schafft ein ernstzunehmender Spieler im Gesundheitsmarkt zu werden hat der Aktienpreis die Chance auf Vervielfachung. Ich habe in vielen Foren recherchiert und festgestellt, dass jede Menge Leute auf die Glucose-watch-Funktion warten, die ja auch (Kooperation mit Dexcom und Invest in das start-up SANO) kommen soll. Nur wann genau weiß keiner. Apple ist da auch dran (komplett non-invasive), es gibt aber erhebliche Zweifel, ob diese Variante je funktionieren wird. Auch JNJ hat sich an dieser ultimativen non-invasive-game-changer Version versucht und ist gescheitert. Fitbit versucht den Mittelweg, also mit kleinsten Nädelchen, die aber noch weniger pieksen als das freestyle-libre von Abbot. Ich selbst habe zwar noch keinen Zucker, aber mein Langzeitwert deutet darauf hin, dass die Wahrscheinlichkeit Altersdiabetes zu entwickeln erhöht ist. Ich hatte daher mal das freestyle libre für einige Wochen um meinen Zuckerwert zu beobachten und zwar nicht nur punktuell sondern eben als permanenten Wert mit feinen Diagrammen. Ich treibe jeden Tag Sport und habe bislang kein fitbit-Teil, weil ich einfach ungerne eine Uhr trage. Sollte fitbit es gelingen ein freestyle-libre-Konkurrenzprodukt in seine Uhr zu integrieren (die weniger invasiv arbeitet) würde ich mir eine solche umgehend (egal was es kostet) zulegen und würde dafür auch monatliche Beiträge zahlen. Wie Eingangs erwähnt wartet die Welt auf so ein Produkt, die anderen (geplanten) features (FDA approved Schlafapnoe etc) sind dann feine Zusatzprodukte die Fitbit von er Konkurrenz abgrenzen. Vielleicht gönne ich mir eine kleine Position FIT, und verzehnfach dies, wenn die Glucose-Überwachung auf dem Markt ankommt. Dann wird es zwar teurer, aber auch egal sein, ob man Fitbit bei 5 oder 8 Dollar gekauft hat, denn der Markt wird gigantisch werden.

  • I once got a Fitbit as a company present. It still is in the box.

    Of all local employees that got it (>3000), I only saw one person that used it (a funny Babarian, whose shirts’ buttons were always overstretched). I bet there were a few more users I did not capture. Being generous, I estimate a penetration rate of 1%.

    I see mmi had a positive experience whereas I had the opposite. This intrinsically makes our fitbit perspectives diverge.

    I think a key element is integration, as users we like hassle-free products. Apple & Samsung will have its “fitbitwatch” series and I bet lower cost players ( Huawei / Xiaomi / One… ) will also launch devices. All integrated with their respective environments.

    I don’t see it that clear (as I said I am driven by my past experience) but hélas, good luck with your bet.

    And yes, let’s hope it is not a second Metro (or SilverChef).

    • Thanks for the comment. With regard to the “next Metro” or “next Silver Chef” please refer to my prvious comment. And I am sure that you only pick winners….

      With regard to FitBit: I think you missed the actual point completely. My “bet” is not about the devices. Your comment clearly reinforces and validates my impression that the market does not see the potential and is only looking at the devices and some anecdotal wisdom.

    • Wow, I can’t believe it. Then only thing some people have to add here are anecdotes and “hopefully it’s not one of 2 (!) losers”?
      I hope it’s one of 20 (!) winners. I hope it’s a Tonnellerie, a 10 bagger. The potential is there.

      The analysis is sound and well reasoned and I am thankful for that.

      Please, one of you anonymous critics, bring something valuable to the table or go, spend the time and stick your neck out there with your own write ups.

  • Let’s hope it is not a second Metro…

    • Thanks for the constructive comment. This kind of feedback is really a great motivation for me to continue this blog despite having little time.

      But to the comparison:

      Metro was a stock that I thought was cheap and not very risky, That’s why I had a relatively high weight (initital position ~6% of portfolio), This turned out to be a mistake as I didn’t analyse the Metro business well enough to understand the real risks (Russia, Turkey etc.)
      FitBit is not “technically” cheap, is VERY risky and I only have a very small weighting. It clearly could turn out to be a loser as well but I see it as a very different kind of investment.

      So decide for yourself if this is a “second Metro”. I don’t see that many similarities apart that there is a downside, which by the way, every stock has that I have mentioned in the blog.

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