How Much Value Does Fitbit Offer Potential Buyers?

The recent comments from Fitbit Inc FIT CEO James Park on its earnings call indicated that the wearable device maker is weighing M&A as part of its future plans.

M&A Chatter

“We expect additional penetration and expansion to occur both via organic development and through M&A, and we see disciplined use of M&A as a key tool in accelerating our strategy,” Park said in the call.

Fitbit has always been rumored as a takeover target of other apparel brands and consumer electronics companies. A regulatory filing showed that a firm called ABM Capital offered to buy Fitbit for $12.50 a share.

But, expectations of slower growth and tepid fundamentals may temper firms moving toward Fitbit, the devices of which are losing consumer interest.

Meanwhile, Apple Inc. AAPL may not be not eyeing Fitbit as it is collaborating with Nike Inc NKE on the Apple Watch Nike+. Also, Fitbit’s products do not meet healthcare-grade standards, thereby making it tough for companies in healthcare vertical to find value in Fitbit.

But, Fitbit’s data on its 25 million to 30 million user base could attract firms with fitness exposure. That said, Pacific Crest’s Brad Erickson pointed out slower monetization rates of the recent fitness-related investments of Under Armour Inc UA in MyFitnessPal, MapMyFitness and Endomondo last year.

In this scenario, the analyst noted “the implied value from Fitbit’s user base exiting this year would equate to around $150 million to $175 million, which is still significantly below the company's market cap.”

Rating And Justification

However, Pacific Crest has upgraded Fitbit to Sector Weight, while noting that its reasons for the previous Underweight rating remains unchanged amid the company’s challenges in the form of lack of utility and poor user trends.

“Volatility unrelated to fundamentals could persist, reducing our visibility on the shares; this prompts us to upgrade to Sector Weight. Continue to view fair value in the $8 range,” analyst Erickson wrote in a note.

A Look Ahead

Looking forward, Erickson sees headcount reductions over the next two to four quarters if demand doesn’t meaningfully improve this holiday.

Amid saturation of fitness tracker demand in developed markets, the analyst said the company should invest more in running watches and needs to come up with healthcare-worthy sensors.

“While we think the company is working on these sorts of developments, we think it could be 2018 before any new products are brought to market,” Erickson highlighted.

Pacific Crest expects unit sales growth to drop to the high single-digits in 2016, and projects units to decline by 6.7 percent in 2017. Also, the brokerage's checks found that demand continues building for holiday, but remains no better than in line.

Stock Performance

Shares of Fitbit closed Tuesday’s trading at $9.56. In the pre-market hours Wednesday, the stock is up 3 percent to $9.86 and is having high short interest. Shares are down 70 percent in 2016.