Fitbit (NYSE: FIT) isn't doing so great. Revenue has tumbled for five consecutive quarters, driven by weak demand for its inexpensive fitness trackers. Newer devices like the Charge 2 haven't offered enough new features to compel the company's user base to upgrade en masse, and Fitbit's first true smartwatch, the $299 Ionic, was a dud. The cheaper $200 Versa smartwatch may fare better, but the company still expects sales to decline this year.
Given these challenges, it's no wonder the stock has crashed. Since peaking soon after going public in mid-2015, it's down a whopping 91%. Investors who bought in early, when Fitbit was worth as much as $10 billion, may never be made whole. But for those who bought at a much lower price, betting on a turnaround, there's at least one reason to be hopeful.
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All the time in the world
Fitbit is losing money. Free cash flow was a loss of $25 million in 2017, and the company expects a bigger loss this year excluding a one-time $80 million tax refund payment. Any money-losing company only has so much runway before it needs to raise more cash to fund operations. The good news for Fitbit investors is that the company's balance sheet is in great shape.
At the end of 2017, Fitbit had $679 million of cash, cash equivalents, and marketable securities and no debt. That cash represents about 62% of the company's market capitalization. The market is valuing Fitbit's business at just $418 million.
The company is hemorrhaging cash, so some pessimism is warranted. It expects free cash flow including that one-time tax payment to be close to breakeven this year, meaning it would be a roughly $80 million loss without that benefit. At that rate, Fitbit wouldn't run out of cash for more than eight years. Those losses could accelerate if it can't turn things around, so the true runway might be shorter. But the bottom line is that Fitbit is in no danger of running out of cash anytime soon.
This cash cushion buys Fitbit time to figure out how to turn itself around. Shifting toward smartwatches and subscription services like Fitbit Coach won't be enough to offset declining sales of fitness trackers this year, and it may be quite a while before revenue finally bottoms out. But Fitbit has the luxury of not needing to be in a rush.
A good first step
Fitbit's turnaround is going to depend on its success in the smartwatch market. The Ionic fell short of the company's expectations, thanks to a high price tag and minimal app support. Priced similarly to the Apple Watch, Ionic just wasn't good enough for the price.
The $200 Versa, Fitbit's second attempt, is a different story. It has many of the same features of the Ionic, powered by an updated version of Fitbit OS, and it's priced just $50 above the Charge 2 fitness tracker. The Ionic was too expensive to convince many existing Fitbit users to give it a try. The Versa should find more success on that front.
Fitbit has 25.4 million active users. In 2016, it sold roughly one device per active user. In 2017, the ratio fell to 0.6 devices per active user. Owners of older Fitbit products simply had no reason to upgrade. This ratio will almost certainly decline further as sales of fitness trackers drop. But the Versa, and follow-up affordable smartwatches, can eventually start to stabilize the numbers.
Versa on its own won't stop Fitbit's decline. It will take additional compelling products, especially ones that convince fitness tracker users to upgrade, to get revenue growing again. And in the longer run, services like Fitbit Coach will need to become a meaningful source of revenue. None of this will happen quickly. But with a mountain of cash, Fitbit can take its time to get it right.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.