Graham,
After your comment I was almost convinced to buy. But I read the following article fool.com and I thought twice.
The article makes a very good point, in my view. But I would like to perform my analysis. Once you buy a device (at least I talk by my self) you stick to it for a long time. You may say that it's a problem you also have with Apple, for instance. But in this case, I see less reasons for you to replace a fitness device than for you to replace your iphone bought 2 or 3 years ago for the latest one.
That being said the following table illustrates, in my view, the challenge:
For the company to double its sales each year, the company has needed to triple its users each year. It currently has ~30 million, in 2016 it would have to have 60 million to generate ~3 Bill in Revenue. In 2017 ~90 million, to generate ~6 billion in revenue. In 2018 ~270 million, to generate ~12 billion in revenue. At this point, I think the market would have matured or near maturing... So the company would need to rely on current users to replace their devices by new ones. If on average every user replaced their devices every 5 years (which I think may be optimistic), there would be around 60 million users buying new devices each year, resulting in ~6 billion in normalized revenues. Assuming a 20% operating margin that would result in a Operating CF of near 1.2 billion times 10 would lead the company to be worth around 12 billion in 2020 (4 years from now). Currently the company is worth 1.8 Billion.
So the upside may be 5 times current valuation in a 5 year time frame. Nonetheless, in a more conservative (realistic perhaps) scenario, Fitbit will mature at 100 million customers and will struggle to fight competition, namely of Apple. Moreover, people will replace their devices in 6 years and the company will end with normalized revenues of near 1.5 Billion, generating a Operating CF of 300 million. In that case the company will be worth 3 billion in 4 years... which would still result in an annual return greater than 10%.
Of course, if Fitbit starts to be successful in the services side, the story will be different. That being said, the equity story here is very uncertain in my view. I agree with the article that Fitbit lacks a moat like all great brands. And that it will be critical for the company future. I also think that current price levels provide a good entry point even if the company does not become highly successful. But the downside scenario may be also a reality if competition is though enough, and there are plenty of reasons for competitors like Nike, Apple and Garmin become tougher... And currently even the most optimistic analyst seems to be more pessimistic than my latest scenario in terms of sales...
Summing up, I will start to monitor the stock price performance, and I will eventually enter if a find an entry point that gives me enough margin of safety. |
