Fitbit (FIT) is going to struggle with its metric results in 2017, be they financial or operational. This continues to be mirrored in what seems to be ever decreasing analysts’ sales estimates for the company in 2017. Although Fitbit hasn’t guided “the street” regarding its 2017 sales and earnings just yet, analysts can model quite appropriately for what will be a year of stagnation and declines in metrics. Already in 2017, Fitbit’s average selling price (ASP) has been slashed as reported by NPD Data Group. As Fitbit’s major retail and distribution partners were not able to clear inventory fast enough through the holiday period, discounting has continued post the holiday selling period and into the New Year. In terms of unit sales, this is also why Fitbit has already executed a QVC Today’s Special program with a significant ASP reduction. When analysts consider the current days on shelf and carry the ASP forward through 2017, they have come to an average estimate on revenues to exhibit less than 2.5% growth. This revenue estimate for 2017 has already been lowered from the previous average estimate of just over 3%, exampling the ASP decline and demand for Fitbit products being curtailed YOY. 

On the subject of earnings, Fitbit is also expected to show a sharp decline in earnings for all the aforementioned reasons concerning ASP and revenues.  Gross profit margins are likely to also wane understandably in 2017. With respect to earnings, analysts are expecting earnings to decline on average of 45% in 2017. When these metrics are juxtaposed with the current valuation of the stock, it is easy to recognize why the stock has severely underperformed through 2016. Fitbit, like its 1-trick gadget product peers (SODA, GMCR, SKUL, GPRO) was always a high growth, expansion centric, profitable company. Within that business model though and historically, these business models are little more than distribution growth stories. When the distribution growth/expansions reaches a saturation point, sales and earnings always falter.  Not sometimes, but always.  On the other side of the negative reality though, for which I will comment further later in this article, there is always a more positive outcome. 

For today, let’s discuss more broadly the reality that investors are facing in 2017 with regards to Fitbit and investing in Fitbit. Much of Fitbit’s public market existence has been maligned by the stocks disastrous performance, and rightfully so as the IPO valuation was not rooted in its fundamentals. With the company exhibiting the inevitable hardships previously mentioned, the stock valuation is now more in-line with its fundamentals and offers long-term investors better days ahead, even if those better days are seemingly distant. 

A lot of investors are of the belief that Fitbit coining its future as a digital health company is a more value added approach to future growth. Fitbit hasn’t modeled the potential for this approach to the public in terms of revenues and they likely won’t because it is well known that the clinical/healthcare oriented market is far less in quantity than the consumer market, by more than 75% to the understanding of a market expert. In short, the consumer market that has generated over $2.4bn in revenues in 2016 for Fitbit is the largest addressable market to be captured. The healthcare market for digital healthcare hardware and software applications is significantly smaller and already found with great competition.  Fitbit, if able to execute on its objectives in the healthcare industry, is hoping to capture a small share of this addressable market.  The list of competitors is large and unfortunately often not considered by the average investor. For some reason they seem to forget conglomerates dominate this market.

These are massively scaled companies well ahead and already exacting products for years in the healthcare industry. They already have implemented the offerings to some degree that Fitbit is hoping to implement. So when investors consider the potential of Fitbit as a digital health care company, it would be best to perform due diligence on the size and scope of its product applications within this industry as well as the competition it faces. Again and for good reason, Fitbit hasn’t discussed these matters or offered revenue potential forecasts for the shift in focus. 

Having said that, I do believe diving deeper into the healthcare market is a natural evolution of Fitbit’s business. I use the term evolution because it is an ever-changing adaptation of the business and nothing new for the business of Fitbit.  While CEO James Park offers this digital healthcare strategy as a new focus for the company, it is not new at all. Fitbit has been a part of the healthcare industry for a couple of years now through its partnership with Cigna Healthcare and other smaller insurers. Of note are also the many clinical trials the company has participated in in the last couple of years. Fitbit’s focus may be more elevated regarding digital healthcare, but it is not new at all.  What are new are the announced partnerships/co-branding efforts with Medtronic (MDT) and United Health (UNH ). But are they anymore significant than that of its previous and ongoing relationships in the digital healthcare market. Presently no, they are not and Fitbit would offer as such given that its corporate wellness business segment (“Other” business from consumer business) garners roughly 10% of its total sales.

These new relationships will add value to Fitbit and its eco-system, but it will definitively take time to reap the rewards from these relationships. United Health providing health insurance plans to roughly 25 million citizens in the United States is a great audience to capture, but it should be recognized that United Health is not buying 25 million Charge 2 units from Fitbit tomorrow. If that were the case, the stock would not express the valuation it currently expresses. No, more than likely this relationship will produce modest sales for Fitbit in 2017 and as United Health continues to test the implementation of the partnership through its members. The number one concern for all insurers regarding wearables in use is the usage rate or the attrition rate for that matter. While most studies show the benefits from the continuous usage of a wearable fitness device, more than 40% of users stop using these devices after 6 months and more than 48% stop using over a 2-year period. Patient compliance being a #1 problem with patient care management for decades and wearables evidencing a high user attrition rate, it’s difficult for health insurers to jump into the wearables category with both feet. 

Along the lines of gradually building these named relationships in the digital health realm, Fitbit is offering itself the time to develop its product to better suit the industry. Apple, Phillips and many other hardware manufacturers already have the desired applications for the healthcare industry built into their devices such as 3^rd-part apps and mobile connectivity. Fitbit’s recent acquisitions of Pebble, Coin and others aim to offer greater applications to the Fitbit products and ease its way deeper into the digit health industry.  In part, this may have been part of the reason large insurers have been hesitant to partner with Fitbit. The 1:1 correlation of Fitbit’s newly announced partnerships and acquisitions is quite telling and fitting for that matter. “If we United Health and Medtronic partner, you Fitbit must offer…”. Hence the operational development of a more specific smartwatch and health centric applications to come.

It’s important to understand that with respect to developing a prototypical smartwatch and adding applications, inclusive of an app store, Fitbit’s smartwatch will likely carry a loftier price tag than its existing products. Two of the key issues surrounding consumer driven smartwatches has been the failure to duplicate the utility of the smartphone and the cost for these devices. The consumer use case scenario and price have been barriers to smartwatch adoption since 2013 and continue to find the totality of the category with steep YOY declines. As of the reported Q3 period, smartwatch shipments fell by some 51 percent. Keep in mind it is during this period that retailers stock up ahead of the holiday selling period. 

“According to data from the International Data Corporation, (IDC) Worldwide Quarterly Wearable Device Tracker, total smartwatch volumes reached 2.7 million units shipped in 3Q16, a decrease of 51.6% from the 5.6 million units shipped in 3Q15. Although the decline is significant, it is worth noting that 3Q15 was the first time Apple's Watch had widespread retail availability after a limited online launch.

"It has also become evident that at present smartwatches are not for everyone," said Jitesh Ubrani senior research analyst for IDC Mobile Device Trackers. "Having a clear purpose and use case is paramount, hence many vendors are focusing on fitness due to its simplicity. However, moving forward, differentiating the experience of a smartwatch from the smartphone will be key and we're starting to see early signs of this as cellular integration is rising and as the commercial audience begins to pilot these devices."

As I have presciently warned market participants in the past, the smartwatch is anything but smart. At such a high price and failing to duplicate the use case scenario of the most mobile platform in use being the smartphone, smartwatches have and will likely continue to receive poor consumer demand.  No matter what manufacturers add or remove from smartwatches, the simple fact is the smartphone can and likely will be able to do more and at a lesser cost. Try taking a photo on your smartwatch. Well you can’t even try anymore because most have eliminated that ill-advised application which attempted to overcome the aspects of human anatomy and physiology. Trying playing a game on your smartwatch. Kind of pointless isn’t it given the screen size and other issues. Try having a private conversation over mic on your smartwatch…you get the picture. Where many vendors tried to make the smartwatch the next generation smartphone, human anatomy and physiology threw up brick walls. And to make matters worse, engineering a smart device that fits on the wrist found itself pricing that failed to shadow the anatomical challenges. 

Fitbit’s future smartwatch… well its poorly received Blaze fitness smartwatch is already selling at a higher price than its fitness tracker product line. For all the hype Fitbit generated by detailing the units shipped during the Blaze launch period, retailers have struggled to sell-through the device since. It sells at a lesser rate, which evidences the potential for Fitbit’s future smartwatch products to a great degree, as if the entire sub-category sales doesn’t do so already. In this respect, investors would be wise to model their expectations from these future products accordingly. 

Fitbit’s future is no more tied to the digital healthcare or smartwatch business segments than it ever has been given the factual data and analytics. The consumer market being the largest market/industry in the world will define the company’s future. Most experts know this for which most companies go to the consumer market first; to build their brand, generate sales and payout seed investors. Fitbit will be just fine and mend its wounds through 2017 and while it develops its products and business further. What has happened to Fitbit as a publicly traded entity was supposed to happen based on its business model. What will happen to Fitbit and FIT next is also supposed to happen for the very same reasons. Fitbit will go through the standard procedure whereby results will bottom over time, the category of wearables will consolidate around a few brands, the competitive threat will lessen, the fad notion will die off and Fitbit will eventually jump over a very low YOY comparison from streamlining operations and the realization of business development. Every single 1-trick gadget company goes through the same cycle, every single one. Fortunately for Fitbit, they will go through this period in its business cycle with ample cash, no debt, a leading brand in the category, and for investors a lesser stock price valuation than it’s peers. So is there an opportunity for long-term investor capital appreciation? History in the hardware category states quite clearly that there is an opportunity just as history predetermined the present reality of Fitbit and FIT. So even as the analysis proves that current operational improvements, product improvements and industry expansion through partnerships is less incremental than proposed by many investors, the business model as it stands has historically evidenced a rebound will come for Fitbit and FIT shares. Patient investors will likely be rewarded and those buying shares at low valuation levels compared to FIT’s peers will benefit to a greater degree.