Shares of Fitbit (NYSE: FIT) fell 7% yesterday following Apple's (NASDAQ: AAPL) unveiling of the Apple Watch Series 4. The Mac maker's popular smartwatch sports a redesign as well as the ability to take electrocardiograms (ECGs), a major health feature that differentiates Apple Watch from any other health-oriented wearable device. Series 4 also includes other features that help users monitor their hearts.
Here's why Fitbit should -- and shouldn't be -- worried about Apple Watch Series 4.
Competing with the world's richest company
Perhaps the best thing Fitbit has going for it when competing with Apple Watch is affordability. The new Versa has been driving Fitbit's turnaround in a big way, as the smartwatch has a much more approachable design aesthetic compared to the Ionic, along with an affordable $200 price tag. Apple Watch Series 4 starts at twice that for GPS models, and cellular-equipped versions start at $500.
However, Apple cascades older products down in price over time, with Series 3 now starting at $279, a smaller premium compared to the Versa. There is a limit on how low Apple will go though, despite its awareness of price umbrellas. Fitbit will always have plenty of room to undercut the Mac maker.
In a research note today, D.A. Davidson analysts said they believe the Versa will still appeal to price-conscious consumers, which may mitigate the competitive threat that Apple Watch Series 4 poses. D.A. Davidson reiterated a "neutral" rating on Fitbit shares, alongside a price target of $5.50.
Beyond price, it's worth noting that Fitbit smartwatches offer much longer battery life than any Apple Watch, which means Fitbit can offer better sleep-monitoring features. Versa also has an SpO2 sensor, which allows the device to monitor blood oxygen saturation, which the company hopes it can use to help detect sleep apnea in the future. That functionality is still in development, and it's not clear if or when Fitbit will actually release sleep apnea tracking.
Fitbit also intends to pursue FDA clearance on other health-tracking features, such as detecting atrial fibrillation, which Apple announced yesterday for Series 4.
As Wear OS continues to flounder as a platform, with many manufacturers scrapping or pulling back product plans, Fitbit has stepped up to offer the market an alternative to Apple Watch. On the last earnings call, Fitbit CEO James Park said, "Retailers have been looking for a counterbalance for Apple, and Versa has delivered."
It's too early to say how important the ECG function will be to Apple Watch sales. It's clear that Apple is targeting older consumers, who will fundamentally have more health issues and derive more value out of heart monitoring -- and also have larger budgets. If taking ECGs with a smartwatch proves to be a killer use case, Fitbit may need to develop comparable functionality but with a much smaller R&D budget compared to the world's richest company. That would pinch Fitbit's financials further at a time when it's trying to regain profitability.
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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 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.