Fitbit Inc. (FIT)
Investment Research Report

Supporting Personal Health - Enabling The World
The obsession of living and eating healthy is not news. Virtually every New Years, millions of resolutions are made, gym memberships purchased and weight loss programs started.  But success is not found in the resolution.  Success is measured in how long the resolve lasts.  Most of the time, it’s not very long.

What’s new is the trend in wearable devices that monitor, motivate and turn a resolution into a reality.  Fitbit is one major force leading the charge.  The first Fitbit, introduced in 2008 was little more than a simple activity tracker.  Today Fitbit has over 8 different products designed to help people become more active, maintain a healthy diet, sleep better and ultimately, create a healthier human being.

The Wearable Device Market is Red Hot
According to the research firm International Data Corp (IDC), the market for Fitbit’s wearable devices is red hot and yet still is getting started.  IDC predicts wearable devices will reach 110 million units worldwide in 2016.  That’s a 38% increase y/y.  The wearable devices market is expected to grow in double-digits from now through 2020, with shipments hitting 240 million units.  Wearables include more than wrist bands that can sync with a user's smartphone and track heart rate and calories burned, among other data.   The category is expanding, incorporating such products such as clothing, eyewear and audio devices.  

Fitbit is not a lone voice in the wellness business.  Diets, fitness clubs, weight loss programs - the healthy living trend is ubiquitous.  Providing a constant way to provide feedback and support is what Fitbit is all about.

In the wearables business, there is formidable competition from Apple and numerous Android devices and Apps.  Based on the IDC data, the 20 million units sold in 2015 by Fitbit amounts to a strong 25% share of the world market and about twice that of Apple.

Here Is What Separates Fitbit From the Pack
Living healthy lifestyles on a daily basis is challenging for most people.   Company founder Eric Friedman’s solution is to encourage maximum user participation relying on frequent support.  It starts with the approach that one device does not fit every person.  Each device is intended to match different activities.  So far, Fitbit has segmented the market with 8 separate products from basic monitoring to professional athletic training devices.  Prices ranging from just under $100 to $200 are affordable to a broad range of incomes.

Fitbit works with both Android and iOS,  making it universally adaptable.  Since 2008, the company has sold 30 million devices with 17 million or 60% still active units.  Of the 18 million registered users in 2015, 72% are active users.  This is unprecedented behavior for the fitness industry.  The greater the number of active users the greater opportunity to enhance monetization of Fitbit’s customer base.

Creating A Unique Ecosystem
Competing in a world of Apple and Google is no small challenge. It takes great creativity.  Having their own so-called “Ecosystem” provides both Apple and Google with tremendous advantages in accessing the consumer.  Fitbit is building its own innovative ecosystem.  

The company is partnering with major corporate Human Resource programs that strive to help control their healthcare costs.  Fitbit has over 1000 corporate wellness customers including Target with over 135,000 employees.  Every employee is able to purchase a device of their choosing at a specially discounted price, directly from Fitbit.  This program creates huge unit sales and profit leverage.  Revenues have more than doubled in each of the past few years since the program began.

Fitbit recently entered into partnerships with Under Armour to promote wearables with Under Armour products.  Fitbit is also partnering with Amazon to promote its voice service Alexa.  Users will now be able to receive health and fitness prompts on both devices.  This is just the tip of the iceberg.

Growth Has Been Explosive
Fitbit is on a growth curve shaped like a hockey stick.  Over the past three years revenues have increased 6-fold reaching $1.8 billion in 2015.  Taking a conservative approach, management expects 2016 to reach $2.5 billion or 40% over last year.

Net income reached a record $175 million last year, a 33% gain over 2014.  EPS were $0.75 last year and thus the stock is trading at a very reasonable 20 times trailing earnings.  For 2016 management is aiming for a big 53% gain in per share earnings to $1.15 giving the stock a forward PE of just 13.

New products accounted for 80% of last year’s revenues and here are some of the key forces we will be watching as this year unfolds:

Fitbit will make a global launch of new products, Fitbit Blaze and Alta.  Launching media campaigns around the world is expected to drive higher sales.  In addition Fitbit will further develop its Digital Health strategy and expand corporate wellness offerings.  In short, the company will be hitting on all cylinders.

                    Fitbit Inc.
                    Year Ended Dec 31
                    (In thousands)
                            2015           2014           2013
Revenue    $1,860,000   $750,000   $270,000             
Income          $175,000   $130,000   ($50,000)
EPS                     $0.75        $0.63          $-1.32

Financial Strength is Solid
We love companies that generate cash and have minimal debt.  Fitbit is right in that league.  With $660 million in cash and NO DEBT, Fitbit is highly liquid and able to support high levels of future growth.

Over the past year, shareholder equity increased dramatically from the conversion of 140 million convertible preferred shares that were outstanding.   These shares were issued prior to the company’s IPO in 2015, to early stage investors.   Other than the dilution to the common stock base, there is no other material affect.

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