The Bear Case on Fitbit

It came as a surprise to most when Fitbit finally unveiled their financial numbers in their S-1. The company did over $700M in revenue last year (that’s over 10M devices sold!) and maintained an EBITDA margin of close to 26%. It was even more surprising how well FIT was received by public market investors. Fitbit’s  stock surged almost 60% on its opening day and has continued to outperform until its first earnings call. On August 5th, the company lowered revenue guidance and indicated that margins will decline in the next quarter, sending the stock down ~16% in after-hours trading.

Since I’ve been fairly bearish on FIT ever since its IPO, this bleak financial forecast did not come as a surprise. It seemed as if investors were so impressed by headline financial figures that they didn’t look further into Fitbit’s business metrics. FIT’s cumulative device sales track closely with registered users, which indicates that users rarely buy more than one device (despite Fitbit’s wide array of offerings). 

And, although 1 in 10 Americans owns a fitness tracker, research show that ~50% of them wind up in a drawer somewhere within six months. This kind of high user drop-off and low purchase repeat rate is a leading indicator of slowed growth down the line.

I’ve also always been skeptical of the product itself. Already, we have seen several startups, like Misfit and Moov, approach the wearables from the low end. In fact, you can buy a pretty decent activity tracker on mi.com (by Xiaomi) for $15! With Fitbit also victim of product recalls (the latest for the Fitbit Force in October 2014), it becomes clear that FIT will be subject to margin compression.

While Apple has indeed created general lift for wearables with the release of the Apple Watch, it has also set a price ceiling for these devices. For $350, you can get the lowest-end Apple Watch that does activity tracking on top of all its watch-specific apps… so why would you pay more than $300 or even $250 for a Fitbit?

Given these dynamics, Fitbit really runs the risk of becoming the Samsung of Wearables. While Samsung was able to grab a large share of the Android phone market a few years ago, the company has been slowly losing its footing to the likes of Apple and Xiaomi. Formerly the top mobile device maker in China and India, Samsung lost its footing in both crucial markets in the second quarter of 2014. How can it avoid this fate? Here are some suggestions:

  • Go Niche: Sometimes the right answer is a counter-intuitive one. Samsung failed in some cases because it flooded the market with a slew of low-end models – none of which appealed to the average consumer. Instead of trying to please everyone, Fitbit should take some of SoulCycle’s ethos and target a small and passionate niche. This may mean creating a Fitbit targeting fashion-forward women (a la Ringly), or creating a Fitbit for hardcore athletes (a la Athos). The wearables market will be large, but not necessarily homogeneous
  • Application and Service Integration: Samsung failed to build usable software and useful services on top of its hardware component. Samsung’s proprietary OS, Tizen, also never took off. I know Fitbit is incredibly focused on their consumer mobile app, which is performing well in the iOS and Google Play stores. The company has already made headway in this area by integrating more social and smartwatch-like functions to their fitness trackers, and should building the software and services layers.
  • Put Health First: Fitbit has proven its ability to make an activity tracker with a few bells and whistles. With the acquisition of FitStar, the challenge becomes making the app and wearable integration increasingly valuable to the user from a health-first perspective. In order to increase its unique value proposition and user retention, the Fitbit app should not only track activity, but find ways to increase and promote well-being.

(The Lack of) Maternity Leave and Infant Mortality: Correlated Issues in the USA

I was reading again about Marissa Mayer’s pregnancy and her choice to forgo maternity leave. While some may applaud her dedication to her job as almost feminist, I see it as largely detrimental to not only the feminist movement, but to herself. 

Whereas feminists once predicted that the rise of women would come with an attendant set of policies designed to make the world fairer, more humane, and more just, successful women have largely achieved by fitting the mold, not breaking it.

The NY Mag article that discusses this issue also point to the affect of maternity leave on the health of newborns. 

Mandatory parental leave wouldn’t just make life easier on moms and dads, it would improve health outcomes for babies. Research shows that “ten-week paid maternity leave was associated with a reduction in infant mortality rates of 1–2 percent; a twenty-week leave, with a 2–4 percent reduction; and a thirty-week leave, with a 7–9 percent reduction.“

This immediately reminded me of another study that compared the infant mortality rate between developed nations. 

We selected the subset of countries that are both wealthy (nominal GDP per capita over $20,000) and have a population greater than 10 million (upper third of national populations, no city-state countries) as a comparison group. This comparison group consists of 14 countries: Australia, Belgium, Canada, France, Germany, Greece, Italy, Japan, Portugal, The Netherlands, South Korea, Spain, the United Kingdom, and the United States. […]

The United States has the highest rate of infant mortality of any of these comparison countries while Japan, the competitor with the longest life expectancy, has the lowest.

It dawned on me that the average employer probably doesn’t see maternity leave as a necessity, but rather as a luxury afforded to new mothers.

The United States is now the only industrialized country that doesn’t require employers to offer paid time off to new parents.

As the article emphasizes, I agree that it is not until we have mandatory maternity leave that we will be able to prioritize health, quality of life, and gender equality.