Fitbit: The True Oppurtunity

On news that a Fitbit has helped save a man's life and with the stock being up over 10%... Today I want to talk about the true potential of Fitbit.

Right now, Fitbit is a fitness company. The company has a focus on helping people get in better shape. The social platform allows users to interact and compete against each other. However, the great opportunity for the company lies beyond fitness, it is in overall healthcare and corporate wellness programs. 

A Fitbit may help insurance companies save money. If people wearing Fitbit devices lead healthier lifestyles, insurers may pay out less in health care costs in the long run. Health insurers may begin subsidizing Fitbit devices to their customers. After all, just a few days ago it was reported that a Fitbit saved a man's life. The doctor was able to utilize data from the Fitbit to administer medical treatment properly.

I see three points of focus for Fitbit to transition further into being an overall healthcare company.

1. Greater analytics & appealing visual dashboard

2. Statistically proven health benefits of the device

3. Increasingly accurate sensors

Fitbit is doubling R&D spending for this year. CEO James Park has mentioned they view themselves as a "digital health and wellness company" and 2016 will be a year for increased
"software improvements, more algorithms, and coaching". This speaks beyond getting people up and running more, he is looking beyond the hardware and seeing what these devices can tell us. 

Analytics provided to healthcare insurers can help them understand how a Fitbit leads to a healthier lifestyle, what level of activity or heart rate can lower the chance of heart disease. Actionable insights from Fitbit will force the hand of insurance companies. It will become clear that they must find a way to get these devices into the hands of their customers. At that point, not only will sales from the physical devices soar but also Fitbit will begin to monetize additional aspects of the business. The data and analytics they provide can be monetized. 

Of course, for all of this to occur, the sensors on the devices must improve. It's a safe bet that Fitbit engineers are working hard to do just that. If you believe that this is a possibility, it may a worthwhile investment while the company is valued at just over $3 Billion. After all, the healthcare sector is a $1 Trillion plus business per year.

Wearables & Personal Health Data

Recently, the viability of wearable devices has been put into question. Both pundits and consumers alike are asking themselves, "What is the point?" with many calling the devices a "fad". This question is a valid concern, for after all, what does it mean to when users learn they walk 10,000 steps in a day, have a resting heart rate of 60 beats per minute, they slept for 7 hours 50 minutes last night, or see that they gained 6 pounds over the past 3 months?

Latest Fitbit lineup of wearable devices

I can understand these comments. Consumers want products to be simple and easy to use. Right now, these users are questioning whether these devices have a purpose beyond nudging them to exercise more. Let us take a look at the current user interface design for Fitbit:

Here is a chart of my resting heart rate over the past month.

Looking at takes some time to see what is going on. First, I can see clearly that on weekends my heart rate is lower, presumably I am more relaxed. On the 15th of March I was quite stressed at work, which was followed by a week of elevated heart rate. The precipitous decline shows the result of when I made a tough decision. In the future, I think Fitbit will make it easier to ascertain why your heartbeat is above or below normal levels, and suggest ways to adjust your behavior accordingly. Patterns may emerge, for instance, if you exercise 30 minutes per day, your heart rate may show you in a healthier range. If you eat certain foods or follow a certain diet you may see the corresponding results in your heart rate. Right now, the data is not intuitive, patterns don't jump out at you. That will change over time.

Next, Sleep Data.

Again, this gives almost nothing of true, useful value at first glance. It's nice to see how much you sleep, or how little you are sleeping. Although one thing I have found interesting, is that people have found out that they suffer from sleep apnea after they purchased a Fitbit by being able to see how many times they were restless at night. Moving forward, I think that the medical profession will be able to pinpoint certain disease onsets by studying user sleep patterns.

Wearable technology is about more than counting steps and working out. The next step is automatic data analysis for doctors to use and for each individual to have a personalized health assistant. Companies like Fitbit or Apple now need dedicated teams of scientists and doctors to analyze, link, and come up with suggestions based on the user's health data that these devices are capturing. Sleep trends may be correlated to caffeine consumption, stress, or overall health. The timing and duration of weight loss or weight gain can signify the onset of an illness. Our resting heart rate over time may be useful in trying to predict and prevent heart disease. We are just beginning to see this take shape. To count out wearables as nothing more than expensive pedometers is a mistake.

It reminds me of noted economist and NY Times writer Paul Krugman, who penned an article in 1998 in which he claimed... 

"By 2005 or so, it will become clear the Internet's impact on the economy has been no greater than the fax machines."

It is easy for people to be dismissive of new technologies. People may disregard many transformative ideas right up until the point they become mainstream. Wearables today may feel bulky and redundant to your smartphone, but they are becoming mainstream. Continuous improvements will allow these devices to gather valuable insight about ourselves that will help us all lead happier, healthier, and ultimately longer lives. 

Fitbit & GoPro

Four quick reasons why Fitbit is NOT GoPro... so don't trade like it.

1. Executive Pay. The CEO and CFO of GoPro have sky high compensation packages. In fact, CEO Nick Woodman was the highest paid CEO in 2014. He even bought himself a fancy new yacht for about $40 million (Source). Compare that to CEO James Park of Fitbit who receives a modest $300,000 salary and has claimed that "Growing Fitbit is his life goal" (presumably sailing around on a $40 million yacht doesn't fit in with that goal). Some executives IPO their companies to cash out, while others look at the IPO as an opportunity to gain additional funding and grow the company further. The difference here is clear. The CEO of GoPro used the companies IPO to buy himself a yacht, while Fitbit's CEO is looking to make strategic acquisitions to grow the company.

CEO of GoPro was making $10 million more than Larry Ellison of Oracle. Executive pay is barely behind that of Satya Nadella, CEO of Microsoft, a company with a market cap 400 times that of GoPro. 

2. New Product Launches. GoPro has not come out with a significant new product since the Hero 4 series launch in 2014. Fitbit has announced a watch (the Blaze) and a new revamp of one tracker line (the Alta) for March launch. Continuous new product initiatives will help Fitbit maintain it's market share lead in wearables. On the other hand, GoPro has been caught by competitors, and it seems only marketing is keeping them ahead of the competition in the short term. 

3. Data/Software & Social. Fitbit is focusing on becoming a health company. The data they collect from users will be used to increase the health of those same users. Data is king in todays world, and CEO James Park has said that 2/3 of R&D is spent on software. That's a great sign and proves Fitbit understands that the company's true value is beyond just the hardware. True value comes from what they can tell users and how an analysis of the health data will lead to healthier lives of its customers. Fitbit's $50 per year premier membership for additional user data insights is a good step in that direction. This differs drastically from GoPro which offers little value beyond the camera hardware. The video editing software that GoPro provides has little intrinsic value to consumers who have many options in the space. Software and social aspects are an important way to rope consumers into a growing ecosystem, something Fitbit is clearly focusing on. Due to network effects, the more people that purchase a Fitbit, the more valuable it becomes for others to get one  as well. 

4. Financial Strength. Fitbit has been a profitable company for some time now and has near 0 debt on the balance sheet. Conversely, GoPro turned a loss in it's latest quarter, a holiday quarter nonetheless. Not many new tech IPOs are able to turn a profit so early, Fitbit has been an exception and looks to be in good shape on the financial front.

Ultimately, fears of Fitbit facing a similar demise to GoPro are overblown. Do not be surprised to see a decoupling of the stock price correlation. Fitbit's future is much brighter than GoPros and the market is sure to figure that out in time.

Fitbit Blaze & the Need for Speed

Fitbit recently announced it's newest product line, a smartwatch deemed the 'Blaze'. Similar to the Apple Watch in looks, the Blaze touts 5 days of battery life and a strict focus on fitness features. CEO James Park talked up the "style" of the watch and wants Blaze owners to have a simplified user experience. Not only does it look like an Apple Watch, the CEO is starting to sound like an Apple executive.  Investors were left unimpressed with the product and the words, the stock has shed over 30% since the announcement.

                   The Apple Watch                                 vs.                                   The Fitbit Blaze

According to investors, the two years of resources Fitbit spent developing the Blaze may have been better used elsewhere. Though consumers seem to have a different opinion than investors. The watch went on to win multiple awards at the CES show it was unveiled at. Now valued at 30 times earnings, investors are expecting bigger and better than just the Blaze. I believe current worries about Fitbits future lie not with the Blaze, but with two other things.

Before going into what needs to be improved. I need to clarify that I am bullish on the Fitbit's future and the future of wearables in general. Here is what I think Fitbit does have going well for it right now.... 

1. The brand name and beneficial network effects of controlling 85% market share.
2. Increasing use of Fitbit in corporate wellness programs
3. The social appeal (Challenges, Forums)
4.. Potential monetization of user health data analysis... the $50 per year Fitness Premium is moving in this direction.
5. Growth of overall wearable markets (The pie continues to grow)


Now, there are plenty of quick software improvements that will make existing customers more involved. Here are the two improvement areas that Fitbit investors should be more concerned and excited about...

1. The slow pace of software enhancements
2. The lack of lineup refresh. 

CEO James Park has touted that Fitbit has never had a bad quarter, indeed the 8 year old company has consistently turned a profit and has little to no debt. That cannot be said for plenty of other companies that had IPOs in 2015. And it is a great foundation for the company to build on, but moving forward the company needs to move faster, and the insistent on maintaining profitability in the short term may be holding the company back and allowing competitors to catch up. Apple, Under Armour, Microsoft and others that have expanded into the wearables market all have deeper pockets. Growth is key to maintaining the edge for Fitbit. Fitness trackers are not a fad, people do truly love quantifying their workouts. As the current leader in market share, Fitbit needs to continue improving and continue innovating or else others will quickly catch up.

Software should be a #1 priority for Fitbit. The company does have a forum entirely dedicated to new software Feature Requests. Browsing through the posts, you can quickly spot posts by customers who love their Fitbit, but want it to be able to tell them even more. Some requests are listed below.


- Additional challenges beyond steps and daily challenges. Something like adding in a 1 hour workout challenge, or a monthly calorie challenge etc...

- Better sleep analysis, possibly combining sleep with heart rate analysis to gain additional understanding of our sleep patterns. A better user interface.

- Adding exercises like push-ups/situps and cycling
- Idle Alert to buzz you when you've been inactive for a certain period (post has been up since 2013)
- Alarms that can wake you up naturally based on your sleep pattern (post has been up since 2013)

Even very a simple addition like adding new clock faces have been left untouched. What are software engineers doing at the company?

Additionally, I think Fitbit should be investigating the potential for bands that can track heart rate or blood pressure. The heart rate monitor is not as accurate as it needs to be, as recent class action lawsuits show. Bands with sensors would help incorporate even greater levels of accuracy.

There are plenty of ways for Fitbit to keep moving forward. An emphasis on software and an entire lineup refresh with better sensors is monumentally important. The current challenge feature, the ability to add friends and communicate about your workouts throughout the day is a major differentiator from other fitness trackers. Investing in hardware is important, but the ecosystem of Fitbit needs to be greatly expanded and utilized much more effectively to fend off competition. A moat needs to be built to keep users from jumping ship so easily if cheaper competitors exist.

Ultimately, I think Fitbit is a buy at it's current level of $17-$18. They clearly had a great holiday season, backed up by being the #1 downloaded App on the Apple App Store over Christmas. The company is off to a fast start, but now it needs to put it all together.