Despite Smartwatch Plunge, Wearables Squeeze Out a Gain

By Evan Niu, CFA Markets Fool.com

Apple Watch Series 2 focuses on fitness. Image source: Apple.

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The nascent smartwatch market is already hitting a speed bump, but that didn't stop the broader wearables market from squeezing out a modest gain, according to recent estimates from market researcher IDC. Fitness trackers continue to prove popular, despite the categorical threat that multipurpose smartwatches represent. That's good news for Fitbit (NYSE: FIT) and bad news for Apple (NASDAQ: AAPL).

To be clear, we're not talking about a particularly impressive gain for the wearables market, with units growing just 3.1% in the third quarter. Still, that's a whole lot better than the 52% plunge that the smartwatch market, which is a subset of the wearables market, saw during the same time frame.

Survey says

Here's how the wearables market shook out last quarter:

Vendor

Q3 2016 Units

Change (YOY)

Fitbit

5.3 million

11%

Xiaomi

3.8 million

4%

Garmin (NASDAQ: GRMN)

1.3 million

12%

Apple

1.1 million

(71%)

Samsung

1 million

90%

Others

10.4 million

26%

Total

23 million

3.1%

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Data source: IDC. YOY = year over year.

It's useful to compare the smartwatch figures to the wearables figures, although there isn't a whole lot of data available since IDC only recently began releasing estimates specific to smartwatches. IDC had previously pegged Q3 2016 smartwatch shipments at 2.7 million, which represents approximately 11.7% penetration of the broader wearables market. This will be an important metric to keep track of going forward, as it will show how much of a threat smartwatches represent to basic wearables. Apparently, not much for now. For reference, smartwatch penetration of wearables was 15.5% in Q2 2016.

For Fitbit, this is especially meaningful because it also defines the urgency with which Fitbit must expand into multipurpose wearables that run third-party apps, if at all. The company continues to move upmarket with more expensive devices, although it has yet to support third-party apps. The recent rumors that Fitbit may acquire beleaguered Pebble may indicate its intentions to do just that.

IDC's estimates for Apple Watch unit volumes in the third quarter are unchanged from IDC's October release. It's worth noting that Apple is the only vendor in the ranking that only offers smartwatches and does not offer a basic wearable product. Garmin and Samsung offer both types of wearables, and we can similarly compare the two categories.

Vendor

Smartwatch Units

Wearables Units

Smartwatch Percentage

Garmin

600,000

1.3 million

46%

Samsung

400,000

1 million

40%

Data source: IDC.

These two companies seem to be faring well relative to the broader penetration rate, and are essentially playing both sides of the wearables market.

IDC believes that in order for smart wearables to really take off, they need to expand beyond fitness applications and enhance personal or professional productivity. That's been challenging for manufacturers given the physical constraints of such a small form factor, and no one considers getting notifications on your wrist a game-changer for productivity. Meanwhile, Apple is doubling down on fitness in Apple Watch Series 2.

Longer-term, smart wearables have a profound opportunity to categorically cannibalize basic wearables, but they're not there yet.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Fitbit. 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.