Chinese wearables maker Huami (NYSE: HMI) recently went public at $11 per share, the midpoint of its price range, and raised $110 million. However, the stock barely advanced during its first two days of trading, partly due to the volatility across the broader market.
Huami produces devices like the Mi Band fitness tracker and Amazifit Blip smartwatch for its partner Xiaomi. Those devices helped Xiaomi match Fitbit's (NYSE: FIT) worldwide wearables market share of 13.7% during the third quarter of 2017 according to the International Data Corporation, making it one of the top two wearables makers in the world.
However, investors might be reluctant to touch another "pure play" wearables stock after witnessing Fitbit's near-75% drop from its IPO price of $20.
After all, the same issues which sunk Fitbit -- market saturation and intense competition -- could also punish Huami. But if we take a closer look at Huami, we'll realize that it's a potentially better wearables play than Fitbit for four simple reasons.
1. Better revenue growth
Huami's revenue rose 74% to $233.9 million in 2016, then grew another 37%, or $194.8 million, during the first nine months of 2017.
That marks a slowdown, but Huami is still growing at a faster rate than Fitbit, which grew its revenues just 17% to $2.2 billion in 2016. Analysts expect Fitbit's revenue to fall 25% this year (when it reports its full-year earnings on Feb. 26) based in part on tougher competition.
2. A more stable slice of the market
Xiaomi and Fitbit are tied for first in the wearables market, but Fitbit's market share of 13.7% in the third quarter actually represents a big drop from its 21.9% share a year earlier. Its total shipments fell 33% annually during that period.
Xiaomi's share slipped from 15.2% to 13.7%, but its shipments only fell 3% annually. If that trend continues, there's a strong chance Xiaomi/Huami could overtake Fitbit as the top wearables maker this year.
That's because Xiaomi benefits from robust sales in China, which surpassed the U.S. as the world's top wearables market (in terms of shipment volumes) in 2015. Meanwhile, Fitbit's APAC (Asia Pacific) revenues dropped 26% in 2016, plunged another 52% in the first quarter of 2017, before finally rebounding during the second and third quarters.
3. Better profitability
At first glance it seems like Huami should be less profitable than Fitbit. Its Mi Band 2 fitness trackers, which offer more features than Fitbit's $100 Alta, cost less than $30. Its new Amazifit Blip smartwatch, which costs $100, is much cheaper than Fitbit's $270 Ionic smartwatch.
Yet Huami reported a net profit of $3.6 million in 2016, compared to a loss of $6 million in 2015. The company reported a net profit of $14.3 million in the first nine months of 2017, compared to a net loss of $3 million a year earlier.
On an adjusted (non-GAAP) basis, which excludes stock-based compensation expenses, Huami's net income surged 351% to $12.3 million in 2016, then jumped another 491% annually to $21.6 million during the first nine months of 2017.
Meanwhile, Fitbit reported net losses (by both GAAP and non-GAAP metrics) in 2016. Analysts expect its bottom line to remain in the red for 2017 and 2018 due to dropping price expectations and rising operating expenses.
4. Xiaomi's support
Huami can generate bigger profits than Fitbit while selling cheaper products because Xiaomi handles its design, manufacturing, marketing, and distribution expenses. Xiaomi owns a 19.3% stake in Huami, while Xiaomi CEO Lei Jun's Shunwei Capital owns another 20.4%.
That symbiotic relationship caused critics to argue that Huami is actually a subsidiary of Xiaomi. Research firm Smartkarma claims that Huami's profitability is a "mirage" and that the company is merely "Xiaomi's subsidiary masquerading as an independently run company."
The firm notes that if "Huami were an independently run company designing, manufacturing, marketing, and distributing its products, it would be unprofitable." That's certainly true, but there's no evidence that Xiaomi will sever ties with Huami.
Instead, those ties should strengthen as Xiaomi expands beyond smartphones with new wearable devices. That expansion would help Xiaomi, which posted 75% growth in smartphone shipments in 2017 (IDC), diversify its business ahead of its long-rumored IPO later this year.
The bottom line
I don't plan to buy Huami since the market is volatile and the stock isn't cheap at 2.9 times sales; Fitbit, for comparison, trades at just 0.8 times sales. Nonetheless, investors looking for a new way into wearables -- or an indirect play on Xiaomi -- should realize that Huami is probably a better bet than Fitbit.
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