In a sign that wearable devices are perhaps about to hit a tipping point, Fitbit has filed a S-1 form announcing its intention to go public. Fitbit, which exclusively produces fitness tracking devices, had a stellar 2014. The company saw a 144% rise in revenue year-over-year and a 441% increase in profit, selling almost 11 million devices versus 4.5 million in 2013. Fitbit also saw a 1580% increase in users paying for its digital trainer service. These numbers certainly are impressive, especially versus 2013, but are they sustainable?
Despite owning 62% of the U.S. fitness tracker market, NPD analysts believe that sales will peak at 32 million devices next year and begin diminishing. This issue isn’t one of popularity for wearables, but instead redundant features. Wrist-worn wearables fall into one of three categories: fitness tracker, sports performance, and smartwatch.
People who are interested in serious data about physical activities are going to use a sports performance device; this market is likely to remain fairly steady. The disruptive force is going to be smartwatches, which typically include the same feature set as a fitness tracker in addition to a lot of enhanced features. Smartwatches, as Fitbit admits in its S-1, will be a growing risk for the company. To help put things in perspective, Generator Research believes that smartwatches will have their “coming out” year this year with sales of $17 billion and by 2020 will reach revenue of $154 billion. As smartwatches gain in popularity, there will be a subset of products that will race-to-the-bottom. These low-margin devices will largely cannibalize the fitness tracker market; so much so that Generator Research estimates the $2.3 billion fitness tracker market will only be $527 million in five years.
This doesn’t mean Fitbit shouldn’t file for an IPO though. IPOs are all about raising the most money possible for a company; going public after such a successful financial year is smart. Fitbit is looking to raise $100 million. For a company that has only raised $66 million to date, funds from an IPO will enable it to continue to develop its software making their devices even more compelling against the competition. Investors should approach with their eyes wide open to the challenges facing companies in this new segment.
