How Much Could the New Apple Watch Hurt Fitbit Sales?

By Markets Fool.com



Image source: Apple

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Fitbit(NYSE: FIT)has somewhat stopped the bleeding of its market share over the past year, and actually recovered some ground. However it could have a new challenge to face withApple's (NASDAQ: AAPL)Watch Series 2, particularly the Nike (NYSE: NKE) branded version that hit stores in late October. While the Q2 2015-to-Q2 2016 market share data looked good for Fitbit, here's why investors should keep a close eye on how those numbers change in the quarters to come.

Company

Global Wearables Market Share(by units sold, as of Q2 2016)

Units-Sold Growth (Year Over Year)

Fitbit

25.4%

28.7%

Garmin

6.9%

106.7%

Apple

7%

-56.7%

Xiaomi

14%

2.5%

Data sources: IDC, Yahoo! Finance.

A deeper look at Fitbit's growth

Fitbit's growth in the last year has been quite the accomplishment considering the increasingly competitive market. The company has achieved this with impressive sales from its newest products, including upgrades to its classic Charge tracker, as well as the newer smartwatch-like Blaze, which features a full touchscreen face. Fitbit has benefited from its relatively low price and partnerships with various companies on employee wellness initiatives.

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Image source: Fitbit

However, for Fitbit's recent success in stopping its market share decline the company has yet to put out any significantly differentiated products. The company is spendingmassively in research and development, which increased nearly 150% year over year in its most recent quarterly earnings, but still there is no news of something more than an incrementally updated basic wrist tracker.

Apple's market share data might not be as grim as it looks

The numbers in the chart above from the IDC, the leader in wearable industry tracking, are for Q2 including both basic (does not support 3rd party apps) wearables and smartwatches, but there is more recent Q3 data available for the smartwatch market specifically.While the basic wearable market has looked strong in Q2, thesmartwatch segment of the market actually declined more than 50% year over year in the recent Q3 data released in October.

The big loser during that time was Apple, with its smartwatch shipments dropping 70% year over year.However, consider that the Apple Watch Series 1 has now been out for two years without an upgrade, and that Q3 data includes only a few weeks of the Apple Watch Series 2being on the market. Apple still makes up around 40% of the smartwatch market.

Image source: Apple

The Series 2 watch is not majorly differentiated from the Series 1, other than that it's waterproof, comes with stand-alone GPS, and has other upgrades such as longer battery life, brighter screen, faster operating software, and a louder speaker -- here's a more detailed review. While the Apple Watch 2 is not a huge overhaul of the Apple Watch 1, the upgrades it does have make it much more suitable for fitness enthusiasts.

Additionally, the Nike+ branded version comes with a band that is meant to be more comfortable for working out in, and a focus on running.Another reason that Fitbit might worry about Apple is the stated accuracy of its heart rate monitors. An October report by HealthDay showed that heart and vascular researchers at theCleveland Clinic found Apple's smartwatch heart rate monitor to be significantly more accurate than Fitbit's devices.Of course, price could be a factor in how much market share Apple can take from Fitbit. The Series 2 costs $370 on the low end, certainly a premium in this market, while the Series 1 is now available for as low as $269. Still, Fitbit's most premium model is not much lower at $250.

What to watch for in the quarters to come

The IDC should release data about the overall wearables market, including both Fitbit and Apple, around mid-December, and then data about the smartwatch market specifically around mid-January. The mid-January Q3 data may still be misleading since it won't have given Apple very long with its new watch as part of the data, but should still show if Apple's new watch is actually a competitive threat to Fitbit's fitness-focused consumer base. Fourth quarter 2016 data, which should be available in early 2017, will be even more interesting to see how both brands performed during the holiday season.

While the market awaits that data, Fitbit's stock has been hammeredbecause of what is perceived as inability to outpace increasing competition, resulting in sales growth pressure. Analysts still expect Fitbit's 2016 revenue to grow 39% over 2015, but with the new Apple Watch looking more and more like a direct threat, investors should watch to see if Fitbit's sales forecasts get revised downward, or if Fitbit's massive R&D spend produces something that can compete.

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Seth McNew owns shares of Apple and Nike. The Motley Fool owns shares of and recommends Apple, Fitbit, and Nike. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.