3 Reasons Fitbit Inc. Bought Twine Health

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Fitbit (NYSE: FIT) recently agreed to buy Twine Health, a cloud-based health platform, for an undisclosed amount. Twine was founded in 2014, and raised nearly $10 million in funding prior to the acquisition.

Twine's platform, which targets workplace wellness providers, tracks chronic diseases and connects patients to health coaches and doctors. Fitbit stated that "nearly all" of Twine's employees will join Fitbit, and that the takeover wouldn't cause any disruptions for existing Twine users. Let's discuss the three main reasons Fitbit bought this platform.

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1. Challenging Apple in healthcare

Fitbit's biggest wearables rival in the US is Apple (NASDAQ: AAPL). Apple added advanced heart rate-sensing features to the Apple Watch, launched a heart rate study with Stanford University and American Well, and is reportedly testing a needle-free blood sugar monitor.

Apple's HealthKit platform and Health app link to a wide variety of fitness apps and wearable devices, its CareKit platform lets developers create personal care apps, and its ResearchKit platform helps researchers conduct medical studies.

Fitbit offers corporate wellness programs to big enterprise customers like Target and insurers like UnitedHealth. It also partnered with Dexcom to link its Ionic smartwatch to Dexcom's blood sugar monitors, and is reportedly developing a monitoring solution for sleep apnea.

Fitbit also recently rebranded its FitStar app as Fitbit Coach, a $40 per year service that features personalized training sessions, adaptive video workouts, and Fitbit radio.

Fitbit could integrate Twine's platform into many of these projects. For example, tests at several major medical facilities -- including Massachusetts General Hospital and the Joslin Diabetes Center -- indicated that the "foundational behavior change principles" behind Twine's technology drove "statistically significant improvements in both diabetes and hypertension management."

2. More credibility in the healthcare community

A common criticism of Fitbit is that its fitness trackers aren't FDA-approved medical devices. Controversies regarding the accuracy of its proprietary PurePulse heart-tracking technology also raised questions about the use of Fitbit's fitness trackers as "serious" medical devices.

The FDA is currently focused on approving software platforms, instead of individual devices, which bolsters the appeal of HIPAA (Health Insurance Portability and Accountability Act) -approved platforms like Twine Health.

If Fitbit integrates Twine into its corporate wellness programs, medical partnerships, and Fitbit Coach, the data could become more useful to both patients and medical professionals. That could potentially broaden Fitbit's software ecosystem and widen its moat against Apple.

3. Diversify its business away from hardware

Fitbit previously enjoyed a first mover's advantage in the fitness wearables space, but the market is now saturated with lower-priced rivals and more advanced smartwatches. Analysts expect Fitbit's revenue to fall 25% this year as its bottom line stays in the red, as the company remains squeezed between lower price expectations and rising operating expenses.

However, Fitbit might catch a break if it expands its subscription-based software programs to generate higher-margin revenues and lock in more users. Last quarter, Fitbit stated that the app's premium customers grew 75% annually, but didn't reveal the exact user numbers and admitted that its revenue remained "immaterial" to its financial results.

Fitbit claims to reach more than 25 million users. If it convinces more of those users to sign up for subscription services, its margins might start expanding again.

The key takeaway

Fitbit's acquisition of Twine Health is a step in the right direction, but it's unclear if the platform will pull all the pieces of its fragmented software ecosystem together. But if Fitbit makes it all work, it might become one of the few hardware makers that can counter the growth of Apple's digital health ecosystem.

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Leo Sun 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 recommends UnitedHealth Group. The Motley Fool has a disclosure policy.