Fitbit has seen a meteoric rise since it's founding in 2007. An early leader in the fitness wearables category, the company has quickly become the de facto leader in the space. Fitbit has sold over 20M devices since inception and boasts 85% market share. The company is a terrific example ofan early leader in an emerging category that ended up becoming bigger than people realized.
Products include a variety of fitness trackers in various form factors - the Fitbit Zip, One, Flex, Charge, Charge HR, Surge and the Aria Wi-Fi scale (see below chart).
According to IDC, the wearable device market is growing faster than any other segment in the global consumer electronics market. In 2014, shipments of wearables tripled reaching a total of 19.6M units shipped (Fitbit sold 11M devices in 2014). By 2019, shipments will reach 126M units representing a $27.9B worldwide revenue opportunity.
While there are a ton of different companies putting out their own flavors of fitness trackers, there are few companies of any real scale. Jawbone is probably the second biggest company but they have had product issues and have been going through a series of restructurings/layoffs (Jawbone Restructures). Many of their employees have actually gone on to work for Fitbit. Nike was also an interesting #3 player in the space, but they gutted their 70 person hardware team last year (Nike Layoffs) and are now focusing on software only. There are numerous small single product companies and interesting Kickstarter/IndieGoGo products, but Fitbit remains the dominant player with a large portfolio of products and massive retail distribution.
Fitbit's revenue has surged from $14.5 in 2011 to $754M in 2014. Gross margin has been healthy for a hardware-based business, steadily rising to ~50%. In the below line chart, you can see that the business demonstrates strong operating leverage (operating costs as % of sales has been decreasing), and as a subset of opex, sales and marketing as a % of revenue has been pretty consistent as well. As a result, EBITDA margin has risen to approximately 25-30%. It's worth pointing out that given that this is a business selling physical products, it will be subject to product issues, new product execution and product recalls that tend to plague hardware-based businesses. You will notice that in 2013 their gross margin tanked to 22% as a result of product issues with the FitBit force which had to be recalled. This is an ongoing risk to the business with regards to future products.
Key Performance Indicators
The business is fairly straightforward when compared to other Internet businesses. Key KPIs include devices sold, revenue per device and EBITDA per device. All have been on the rise though there is some lumpiness and seasonality in the business (big Christmas season). As the company gets into higher ASP product offerings and continues to drive margins up, all of these metrics will continue to rise.
Another metric that I did not plot is active users. The company defines an active user as someone who in the trailing 3 month period had an active Fitbit Premium subscription, paired a tracker to his or her Fitbit account, or logged 100 steps with a tracker. This metric has little to do with the operating growth of the business but is certainly an indicator of the size and growth of their community. They had just 558k active users coming out of 2012 but had 9.5M active users as of Q1 2015. Companies like Apple and GoPro have created value far beyond their hardware offering by building thriving ecosystems around their brand, and the opportunity exists for Fitbit as well.
There aren't a lot of great hardware comparables to use when valuing Fitbit. Generally, hardware companies trade anywhere from 0.5x to 4.0x forward revenue, or 3.0x to 10.0x on an EBITDA basis, depending on their profitability. Apple and Samsung generate 20-35% EBITDA margins which is similar to Fitbit. On the other hand, GoPro, a closer comp, is worth 4.0x 2015 revenue and almost 20.0x EBITDA (20% EBITDA margins).
Hardware-based businesses can be quite finicky and are difficult to value, particularly fast growing ones like Fitbit. The company has an initial pricing window of $14-16 which would value the company at $3.3B enterprise value at the midpoint. Inputting some reasonable growth assumptions for 2015, that would give the company a 2.2x 2015 revenue multiple and a 8.3x 2015 EBITDA multiple.
Fitbit is an exciting growth story in the fastest growing segment of the consumer electronics market. Time will tell if they can build a thriving ecosystem and brand in the years to come. We will of course have to keep a close eye on new entrants in the wearables category such as Apple, Google and Samsung!