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  • Vincent Shen: Get your portfolio in shape with Fitbit, on this episode of Industry Focus.

  • Greetings, Fools! Welcome to Industry Focus. I’m Vincent Shen with Dylan Lewis. I’m

  • hosting today, filling in for Sean. How you doing, Dylan?

  • Dylan Lewis: Good, Vince. A little mix-up here.

  • Shen: Yeah, I’m getting used to a bit more of the hosting role here. So bear with me,

  • audience. I think we have a really fun show today. Very timely too, because the company

  • were talking about actually just went public yesterday.

  • Lewis: Yeah. Fitbit just hit the market yesterday. Shares opened up at $30.40 Thursday morning,

  • up 52% from their IPO price of $20. They closed about 48% up. Theyre up again today about

  • another 5%.

  • Shen: Wow. So, definitely a successful offering by most standards.

  • Lewis: Yeah. The market seems very happy with the issuance. Into some background on the

  • company -- the company’s mission -- the company helps people lead healthier, more

  • active lives by empowering them with data, inspiration, and guidance to reach their goals.

  • How theyre doing that with these wrist band fitness trackers that you probably see

  • a bunch of people lout with.

  • I know tons of people here at Fool HQ wear them. They seem to be pretty popular. I know

  • we can get them through our internal Gold system. I’ve definitely seen quite a few

  • people with them out.

  • Shen: Yeah. I have to say, if I didn’t wear the normal, more traditional watch and I had

  • to pick up a technology focused wearable, Fitbit would definitely be in the running

  • for me. I like it. They have six different designs, and some of them are much more minimal

  • and it looks like a Livestrong bracelet. I prefer that kind of look. Definitely some

  • good products.

  • Lewis: Yeah. Just some context for our listeners, in terms of product functionality, theyre

  • capable of tracking steps, calories burned, distance traveled, active minutes; and they

  • provide a lot of this in real time. Some of the more advanced models can also handle sleep

  • duration and quality, as well as heart rate and GPS info. So if you have an exercise route

  • that youre regularly going on they can track you on that. They can also go with speed

  • and distance.

  • Shen: Very nice. They also have a lot of analysis that you can do from the data that it collects,

  • right? It’s supposed to reinforce your fitness routine.

  • Lewis: Yeah. There’s these nudges within this platform they built out to keep you going,

  • and keep you motivated. So it’s not simply something that’s tracking, it’s something

  • that is actively involved in your workout.

  • Shen: Okay. So, how about this deal? Overall it traded up almost 50% on the first day.

  • It seems like a pretty big success. I’m sure the company’s happy. Was there any

  • other details -- I saw the upsize. They did that twice, it seems.

  • Lewis: Yeah. That’s always a good sign. Total size of the deal was around $36 million

  • -- $37 million with rounding. The company itself issues 22 million shares, and internal

  • shareholders and VCs that were involved in the deal early on issued about 14 million.

  • So, looking at the internal ownership, not too much reason to worry here. Only about

  • 4.4 million of the shares issued came from execs. The rest were private equity and VCs.

  • Shen: Just harvesting their investment share.

  • Lewis: Yeah, and I think it would be great to hear -- with your investing background,

  • it’s rare for us to get this perspective -- what the reaction would be from the team

  • that might have underwritten this. You have some great perspective there.

  • Shen: Sure. Coming from the investment banking world and having worked on deals underwriting

  • IPOs, there’s definitely some very positive signs that this deal was going well in terms

  • of high investor demand. Initially they filed at $14 to $16 per share for their range. The

  • midpoint, gave them an implied valuation of $3.1 billion. They start marketing on the

  • road show, they start meeting with these big, institutional investors, and the demand is

  • very good. Theyre filling the book very quickly. So it allows them to refile.

  • They file an amendment, and theyve raised the range now. $17 to $19 per share, and also

  • theyre allowing the secondary component coming from the inside stakeholders to increase

  • how many shares theyre selling as part of this deal. As if that wasn’t enough -- that’s

  • already a good sign -- for the final deal they end up pricing above the range -- $17

  • to $19 -- they priced at $20. Pricing above an already increased range is a very good

  • sign for high demand, and strong demand from the market.

  • They also increased the size of the deal allowing the inside stakeholders to sell a bigger component.

  • Like I said, their original valuation was about $3.1 billion at the middle of their

  • range, but the final deal had them at $4.1 billion. At the end of the day, after trading,

  • up 50%, they went up to $6.1 billion. I’m sure the owners and big stakeholders decided

  • that the executives of the companies are very happy with those gains.

  • Lewis: Yeah. That’s a pretty bullish outlook and a pretty favorable market reaction so

  • far that weve seen. I think one of the interesting things to note; first day trading

  • pretty much locked up around $30 and hovered within a very tight band. Maybe $31.25 and

  • $29.50. It was pretty tight in there. There wasn’t a ton of volatility in the first

  • day.

  • Shen: Yeah. It was a little surprising. There’s always going to be some shifting around, especially

  • right when it opens. It was almost like a straight line after that first two hours of

  • trading. What do you think, though? $30, $6 billion valuation, these tech companies -- GoPro

  • debuted to similar fanfare. They ran into some issues. You mentioned -- I thought that

  • was a great comparison how similar they are. They have this dominance over this niche.

  • So what do you think?

  • Lewis: I think when youre looking at a company coming public and youre getting

  • a first look at their financial statements, you want to benchmark them to something. It’s

  • a little tough here because there isn’t another pure play fitness tracking company

  • out there that is strictly in that space. You have some of the other companies -- Google,

  • Samsung, Apple -- that are also involved in wearables, but it’s such a small part of

  • their business

  • Shen: It’s a drop in the bucket for them.

  • Lewis: I think GoPro is actually a great parallel for them. It’s a hardware company with the

  • added value of a platform. In Fitbit’s case it’s the add-on incentives that keep people

  • going. With GoPro it’s the media platform that theyre trying to build up and sell.

  • Then I think another huge strength here is the product name. It’s synonymous with the

  • broader category. People are colloquially sayingFitbitto broadly refer to fitness

  • trackers. You have that same brand recognition with GoPro. People aren’t sayingAction

  • Cameras”, theyre sayingGoPro”.

  • Shen: That’s right. “Do you have a GoPro?” Exactly.

  • Lewis: So, that’s awesome from a brand recognition standpoint. Theyre also facing a very similar

  • cast of competitors that are looming off in the distance that could come in. You have

  • your Apple, Google, etcetera, that might be creeping in, off in the distance. I think

  • more than anything else, it’s surprising to see a big tech company with a splash IPO

  • that is profitable. This is something Sean and I joke about on the tech show all the

  • time. In 2014 they had a net income of $131 million, which is rare.

  • Shen: I think that definitely contributed to at least part of the reason why the reception

  • was so hot for this. Going off that, you mentioned the income was $130 for 2014; that’s up

  • very, very rapidly because in 2013 it was a net loss of about $52 million. It looks

  • like their margins -- theyre able to spend more on research and development as well.

  • Their stem marketing efforts and because their margins are still strong their sales are growing

  • so rapidly. From 2011 to 2014, sales have gone up about 50x.

  • Lewis: Yeah. That’s crazy.

  • Shen: Year over year from first quarter 2013 to first quarter of this year, theyre up

  • about 200%. It definitely has those growth numbers that people want in tech and it’s

  • profitable, too.

  • Lewis: Yeah. It’s kind of thebest of both worldssituation. I’ll say another

  • huge strength for them is their gross margins. You look at their 2012 growth margin; it’s

  • around 35% that dipped down to 22% in 2013. Then up to 48% in 2014. I think that’s something

  • they were able to achieve through economies of scale and hitting a critical point in production

  • and distribution. So, those kind of margins allow them to double up their R&D costs -- sorry.

  • Quadruple their sales and marketing expenses in 2014 -- which are great things if youre

  • trying to grow a company.

  • Shen: And theyre still profitable, too. On top of all that. I had some numbers here

  • just to give you an idea. I think they said that since their inception theyve sold

  • about 20 million devices.

  • Lewis: Just about, yeah. Keep in mind that half of that 20 million was just sold in 2014.

  • Shen: So that demand is hitting that tipping point.

  • Lewis: Yeah. This is a very […] market. People are having a lot of trouble projecting

  • out exactly what it’s going to be, and what the major player’s going to be. I talked

  • about their gross margin as a strength before. I think there’s a very real possibility

  • that could see some competitive pressure in a little while.

  • Shen: So, speaking of that; you mentioned how some of the mega tech companies like Samsung,

  • Apple -- Apple, obviously just released this watch that has some biometrics testing stuff

  • like the Fitbit does. It has some similar features, though it’s probably a little

  • bit higher end, more fashion oriented. Whereas this is much more utilitarian. I always hear

  • about threats from China and Xiaomi; what’s their deal here?

  • Lewis: Xiaomi is looming in the background. If you look at the major wearable vendors

  • there’s some data from International Data Corp that looked at Q1 shipments. Fitbit had

  • about 3.9 million shipments in Q1. Xiaomi -- Chinese producer -- had 2.8 and they are

  • just starting to ship out internationally. So, Fitbit products generally range from about

  • $60 to $250. Xiaomi sells a $15 fitness tracker, which is tough to compete with.

  • Shen: That’s very low on the price point. That’s a really easy way for people to get

  • into this market; to try something at almost zero investment. $15? That’s not even close

  • to the next cheapest product, probably.

  • Lewis: Yeah. I think there’s the thought that maybe $15 is too cheap for American consumers.

  • If youre going to commit to something you want to pay a certain amount for it. So Fitbit

  • might benefit from being in what is a prestige pricing against Xiaomi, I think.

  • Lewis: Sure.

  • Shen: I think there’s some strength there. Maybe people not trusting a foreign producer

  • for quality; but that’s a huge threat coming down the pipeline. At the very least though,

  • Fitbit’s products range from about $60 to about $250. So there’s a range. Some people

  • will want to try it initially, minimal features, they can go $60. Then somebody who wants the

  • full watch that -- I believe has functionality with your cell phone, taking calls and things

  • like that -- you can go up to the $200, $250 range. That definitely helps that they diversify

  • what their target market is as well.

  • Lewis: So, Xiaomi is a big threat and I think one of the other big things people need to

  • watch with Fitbit -- this might not be an immediate concern, but it’s something down

  • the road -- is being displaced by a more all-encompassing technology. So this is something that we saw

  • with GPS systems like Garmin in the mid, early 2000s.

  • These were seemingly great companies and then, here comes the smart phone. They have the

  • GPS capabilities on the smart phone. It totally decimated the core market for these companies,

  • and caused them to have to pivot into something else. So I think as you see the Apple watch

  • the apps get better, the ecosystem build out, and the integration become better; that’s

  • another thing they have to be wary of.

  • Shen: Sure. I have two more things that I would like to discuss. The first one is just

  • your opinion on this. You don’t have to commit. Do you think this is a stock that

  • you would buy into?

  • Lewis: I think short term it’s a nice opportunity. I love that it’s profitable, I love the

  • growth rates. They were up 175% in revenue 2013 over 2014, which is awesome. That’s

  • fantastic. I worry about the long term prospects because I think were going to see something

  • similar to what we saw with GPS systems.

  • Shen: Yeah. The potential for technology and consumer products; there’s always potential

  • for that game changer thing to come out and just ruin everybody else’s market and profits,

  • essentially.

  • Lewis: And as soon as one of those conglomerates is willing to commit the resources to really

  • building out a robust system, they can hang out.

  • Shen: Fair enough. So, the last thing was actually something that came up in the news

  • and soiled this really great IPO process. That is a lawsuit that Jawbone -- which is

  • one of Fitbit’s main competitors for the wearables and gadget market -- basically suing

  • Fitbit for poaching employees, and in the process those employees -- before leaving

  • Jawbone -- were taking sensitive, internal documents. Presentations about future strategy

  • and things like that. What do you think?

  • Lewis: Yeah. That’s interesting. That’s very tech, I feel, to have that stuff going

  • on. It’s definitely something to keep an eye on. I don’t know what kind of liability

  • that’s going to be long term.

  • Shen: I think it’s too early to tell. But it is interesting -- “True case of corporate

  • espionage”.

  • Lewis: Yeah. You said they were grabbing stuff off thumb drives and sending stuff on personal

  • emails.

  • Shen: So, that’s just something to keep in mind, too. Like I said, it’s a little

  • early to try and determine what might happen with the legal proceedings, but that will

  • be something they have to -- I think Fitbit’s in a good position to handle that too. They

  • have quite a bit of cash from this offering to deal with any legal battles, right?

  • Lewis: Yep. Very exciting company. A couple things to keep an eye on down the road.

  • Shen: Exactly. All right, well thank you very much, Dylan.

  • Lewis: Always a pleasure.

  • Shen: Appreciate that. Before we go, I want to make everybody aware of a very special

  • offer. If you found this discussion informative, and youre looking for more Foolish stock

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  • You will get two stock recommendations every month with insight from our team of analysts.

  • Just go to focus.fool.com to take advantage of that deal. Once again that is focus.fool.com.

  • As always, people on this program may have interests in the stocks that they talk about,

  • and the Motley Fool may have formal recommendations for or against those stocks. So, don’t buy

  • or sell anything based solely on what you hear on this program. This is Vincent Shen

  • for Dylan Lewis. Thanks for listening to Industry Focus!

Vincent Shen: Get your portfolio in shape with Fitbit, on this episode of Industry Focus.

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    Randy Wei 發佈於 2021 年 01 月 14 日
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