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an example FIT valuation +3

19:42 21-Aug-17


Following up on my recent FitBit sensor note, a subscriber asks:

Do you have any PT for FIT if it successfully launches smartwatch?
In order to really answer this question, we'd have to define what "successful" means in terms of the new product.  There were some stabs at numbers from this traditionally bullish analyst, who is just now echoing my sentiment that the watch is make or break.  The range given runs from a loss of 36 cents per share to a profit of $1.62.  As usual, I don't find that even remotely useful.

Once the watch is actually released and the feature set is known, I'll be able to start making some real guesses.  As already mentioned in my coverage of the last report, multi-day battery life, water resistance and GPS are confirmed.  I am assuming better sensors, and thus data sets, as well.  I also hope for wireless charging, and maybe payments capability.  I do not expect any direct support for mobile phone services, but would like to see a microphone for voice commands and calls via blue tooth.  All of these, along with a price tag of around $300, will figure into how popular the device turns out to be.

We'll start to know what's actually happening in the 3 to 6 months following the release, but I suppose it's instructive to give an example calculation using historical data for context.  FitBit has sold 67M devices to date.  It had just over 50M registered users at the end of last year, and 11.2M feed users in the last report.  Gross margin was 43%, and could increase with direct sales, but will probably be slightly lower for a full-featured watch.  I would personally consider success to be selling somewhere over 6M smart watches in the fourth quarter.  That makes a potential strict valuation calculation look something like this:

6M watches x $300 x 40% margin = $720M gross profit - $350M OpEx = $370M net

$370M / 196.4M shares = $1.88 4Q EPS - $0.82 YtD EPS = $1.06 FY EPS
Even though almost every variable, except the losses for this year's reports, is a guess that is subject to lots of variability, you can easily see that a successful watch launch gets shares back into double digits with only a moderate PE ratio of 10.  I think the wild card that few are talking about is data partnerships with various health organizations, which would likely come at much higher margins over the next couple of years. 

Of course, it's also possible that the watch flops, which would most likely mean Game Over for FitBit and its investors, but it's not really a binary proposition.  Using the math above, I calculate, FitBit needs to sell a little over 4.25M watches by year end in order to turn a non-GAAP profit for the trailing 12 months.  That's probably what it would take to maintain current FIT pricing, and I wouldn't be surprised to see us at or above $6 when the watch actually is introduced, and I can start to refine my outlook.  We'll see what September brings, but that makes shares still look like a high, but fairly good, risk to me right now.  That said, I won't start to have any real price targets until we have a product on sale.