Here's What's Going On in the Wearables Market

Market researcher IDC recently released its estimates on the wearables market, and basic trackers staged a little bit of a comeback by returning to growth in the third quarter. Meanwhile, on the smartwatch front, Apple (NASDAQ: AAPL) continues to lead the way, followed by Fitbit (NYSE: FIT). Looking farther out, falling smartwatch prices will continue to put pressure on basic trackers, tempting consumers to upgrade to more capable devices.

In this segment from Industry Focus: Tech, host Dylan Lewis and contributor Evan Niu discuss the latest news in the wearables arena.

A full transcript follows the video.

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This video was recorded on Dec. 7, 2018.

Dylan Lewis: Evan, not to be outdone on the news front, we have some fresh data from market research firm IDC on wearables and VR. I really love checking these out. I think it's a great at-a-glance for what's going on in the consumer tech space. This firm does such a good job giving people the 5,000-foot view.

Evan Niu: These are really exciting markets in general. Getting this data on these estimates and how it's going is a really useful tool for investors to see, when they're looking at their investments in companies that are playing in and participating in these markets. Wearables is a particularly fun one since wearable tech is a nascent category that's still on the up and up.

What we saw in the third quarter was that basic trackers returned to growth. You know, the Fitbit kind of fitness trackers. That was thanks largely to new product launches in emerging markets. Basic trackers are still pretty popular in emerging markets because they're more affordable. The U.S. market was actually flat in the third quarter because that market is already transitioning from first-time purchases toward your placements and upgrades -- actually, in my opinion, sooner than I would have expected.

Lewis: One of my favorite things in looking at these reports, though, is who's moving where in terms of market share? We can see the competitive landscape. That's always fun. What did you see there?

Niu: This quarter, we saw Xiaomi reclaim #1. Apple had been #1 for the past two quarters thanks to its Apple Watch, but Xiaomi's Mi Band 3, which is a basic tracker, has been selling really well, so they were able to actually take #1 in the third quarter.

If you look at smartwatches specifically, and you exclude basic trackers, Apple is still #1. In terms of the Apple Watch, they launched the Series 4 at the very end of the quarter. So, they only had about 10 days left to the quarter when Apple Watch 4 launched. They also discounted Apple Watch 3. Actually, that lower price point has also been helping drive demand and drive unit volumes. Series 3, expectedly, was the majority of units. But, according to IDC's estimates, the Series 4 was actually almost 20% of unit volumes in just 10 days. That shows how strong the demand for Series 4 was at launch.

Lewis: That's pretty incredible. We can't talk about the wearables space without also talking about Fitbit. We've given Apple Watch its time. What's going on with Fitbit in this report?

Niu: Fitbit has become the #2 player primarily with its Versa smartwatch, which is much more approachable, it's a little bit cheaper. That's what we've seen play out over the past couple of quarters. You and I have covered their earnings a couple of times. We've seen this coming. The good news for Fitbit is, the IDC expects them to keep that #2 status in the smartwatch market, mostly because, as we mentioned in previous shows, Android Wear OS is not competitive. No one's really buying those devices. The market still wants some alternative to the Apple Watch, and Fitbit has stepped up to provide it.

Lewis: Yeah. It's probably good for consumers to have a couple different options out there. It's nice to have some competition, nice to have a little bit of a push on the feature side so they keep innovating.

Niu: The big thing that IDC points out is that healthcare is really becoming a core part of this market. Apple and Fitbit are both really pushing toward these digital health platforms in their own different ways. Now, who gets there first, and who can really build the most robust platform is an open question. It remains to be seen. But, certainly, Apple has a lot more money to invest in building it. That's going to be a big thing to watch going forward, is the underlying platform of these devices.

Lewis: Thinking about this market, though, you have the low-end and the high-end. It sounds like any hardware profits are going to be made on the smartwatch side. Market share gains are going to be happening with the cheaper end of the market. How do those factor into the health solutions that these folks are looking for? Is it that, if we want to track who's going to have the better health platform, we should be looking at the high-end smartwatch sales?

Niu: The basic trackers are just so limited in the amount of data they can collect. The value that people are putting into the actual platform will also determine what kind of device they're interested in. If you look longer-term, smartwatch prices have been coming down quite a bit. Apple does this thing, and they've been using the same strategy for the iPhone for many years, where they extend the overall lifecycle of a product by selling the same product over years and years, but they just lower the price over time. As those prices keep coming down, the difference between going out and buying a basic tracker or buying a smartwatch, even if it's a previous generation smartwatch, will keep getting smaller and smaller. And as that gap shrinks, more and more people will be willing to make the move up-market into a smartwatch that is more capable, can do a lot more things, can collect more health data, and give you more value out of those health platforms.

Lewis: Yeah, it doesn't feel like as much of an upfront investment, right?

Niu: Exactly. Especially if the difference is small. If the difference between a basic tracker and a smartwatch is $20 or $50, which one would you pick?

Dylan Lewis owns shares of Apple. 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 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.