Signs Say Fitbit's Future Is Bright, But I'm Not Buying... Yet

It's been a roller-coaster year for shareholders of fitness-tracking upstart Fitbit . After nearly doubling in the first half of 2015, Fitbit's shares have plummeted in the second half of the year. Shares are now in single-digit positive territory heading into the year's end.

FIT data by YCharts

However, Fitbit's stock chart fails to account for the generally positive changes the company has achieved throughout 2015. As investors begin to sift for fresh stock ideas for 2016, there are two important positives tech enthusiasts should understand regarding Fitbit. These signs put the company on my watch list, but I'll explain why I won't be buying the stock just yet.

1. Fitbit Wellness: a defensible platform? As with most consumer-electronics hardware plays, investors worry that product commoditization could pose an existential threat to Fitbit. Hardware companies can overcome such risks by either perpetually leading in hardware design and innovation or creating a software ecosystem that drives repeated purchases over time. And although neither strategy is a walk in the park, the latter option has typically been a more tenable path to sustained success in the past, which bodes well for Fitbit today.

Source: Fitbit.

Fitbit's leading mobile app, with its dashboard experience, monitors and analyzes data spanning a number of important health-related categories. It leads all other fitness tracking brands, with distribution to over 150 mobile devices. Fitbit has also created a premium subscription tier that enables users of its app to receive enhanced analytics and additional health and wellness planning tools, which should help increase both the profitability and stickiness of its software platform.

Furthermore, Fitbit has been aggressively adding corporate clients into its software ecosystem though its Fitbit Wellness initiative. Although Fitbit doesn't disclose the number of corporations currently enrolled in the program, the company recently stated that it counts over 50 Fortune 500 companies as Fitbit wellness clients, suggesting that the program has indeed found a large, receptive market into which it can grow over the long term.

2. Smartwatch safety? Shipments of fitness trackers have been surprisingly durable, even as smartwatches such as the Apple Watch have entered the marketplace. Here's how recent data from research firm IDC depicts the market share breakdown for wearable tech today:

Source: IDC.

With the fitness wearables and smartwatch markets still in their infancy, declaring winners and losers at this point would be premature. However, the data shows Fitbit maintaining its position atop the market despite facing its strongest competition yet, suggesting that the company's strategy remains on sound footing.

The entire wearables space is also likely to see substantial hardware innovation, which should shift the balance of power in years to come. Although they might never reach the market, Apple continues to file patents for innovative design improvements for the Apple Watch. Furthermore, the likes of Samsungand Xiaomi each enjoy huge installed customer bases and broad brand familiarity. Should any one of these names leapfrog the rest of the pack, the wearables and smartwatch space could look dramatically different seemingly overnight.

Source: Fitbit.

After their recent fall and a strong Q3 earnings report, Fitbit shares are slowly regaining favor within the analyst community as well. I see a clear path for the company to continue to scale from scrappy upstart into a full-fledged market leader, but the risks are so large that I still balk at the idea of buying at current levels.

In terms of a margin of safety, as much as one can hope for it in a growth stock, Fitbit seems more fairly priced than appreciably cheap. Its shares currently trade hands at 53 times its past 12 months' earnings and 28 times next year's earnings. As far as growth stocks go, this isn't awful, but against a market price-to-earnings ratio in the low 20's, it's clear even at today's depressed valuation there are still substantial growth expectations priced into the stock.

That bullishness banks on the wearables market remaining strong and Fitbit continuing to take a significant piece of the pie and doesn't offer much room for error. So while the two reasons I've given strengthen my conviction about Fitbit's long-term prospects, I also want a few more quarters of solid sales growth and sustained market-share position before I buy into this particular growth story.

The article Signs Say Fitbit's Future Is Bright, But I'm Not Buying... Yet originally appeared on

Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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