The Fitbit IPO: Winner Or Washout?

The market is buzzing today about the next big tech IPO – Fitbit (FIT ).

For the record, I fully expect shares of the fitness-tracking firm to rally well above the offer price… which will whip the mainstream media into a frenzy and bombard us with the company’s “wildly successful debut.”

Don’t fall for the hype.

And, more importantly, don’t rush out to buy shares for fear of missing out.

The IPO market isn’t set up to reward everyday investors like us. It’s set up to make us the bag holders, not the profiteers.

This could be particularly true when it comes to Fitbit’s IPO. Here’s why…

h2 Fitbit in Perfect IPO Shape… But Investors Beware/h2

IPOs are all about maximizing value for existing owners and private investors.

That line bears rereading, because you and I (i.e., everyday investors) are nowhere to be found in the equation.

Instead, IPOs are all about venture capitalists, investment bankers, and well-heeled insiders raking in the profits. And in this case, we’re dealing with the savviest among them.

On the VC side, I’m talking about Foundry Group, True Ventures, SoftBank Capital, and Qualcomm (NASDAQ:QCOM) Ventures, among others.

On the banking side, we’re dealing with the likes of Morgan Stanley (NYSE:MS), Deutsche Bank (XETRA:DBKGn), and Bank of America Merrill Lynch (NYSE:BAC).

With so many heavyweights involved – and salivating at the prospects of lining their pockets – it’s no surprise that Fitbit is going public at precisely this time.

The company’s headline financials are off-the-charts impressive. Consider:

• Sales have leapt almost 10-fold in the last two years – from a mere $76 million in 2012 to $745 million in 2014.

• In the most recent quarter, year-over-year sales tripled to $336 million.

• Gross margins have swelled from 41% to 50%.

• Fitbit is profitable – a rarity for IPOs.

• And Fitbit’s global market share checks in at a chart-topping 34%.

As Jan Dawson, analyst at Jackdaw Research, said, “These revenue growth and margin metrics help to explain why the company is going for an IPO now – the numbers are very, very good.”

Indeed! And there’s no better time to demand top dollar than when a business is firing on all cylinders.

h2 The Wearable Rampage/h2

What makes the timing even more compelling – and reinforcing the “it’s going to get even better” storyline for Fitbit – is the fact that the wearable technology market appears poised to launch into the stratosphere.

Tech research firm IDC expects wearable device shipments to triple from 21 million in 2014 to 144 million in 2017.

And we’re well on the way, too, as first-quarter wearable device sales soared by 200%.

Simply put, the market is as ripe as it possibly could be for early investors to monetize their investment in Fitbit.

So much so, in fact, that the company was able to increase the size and price of its IPO.

Fitbit now expects to offer 34.5 million shares between $17 and $19, compared to earlier plans to offer 29.85 million shares between $14 and $16.

So what’s the problem?

A little thing called “history…”

h2 History Repeating?/h2

The Fitbit IPO is eerily similar to the climate that preceded the IPOs for Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA).

Each went public at the pinnacle of their respective industries. And while early investors and owners made a fortune, both stocks proved to be disastrous investments for everyday investors.

(And yes, I warned about both Groupon and Zynga in advance.)

And there’s good reason to believe the same fate awaits Fitbit…

h2 Peak Problems/h2

To its credit, Fitbit pioneered the connected health and fitness market back in 2007. Much like Groupon pioneered the daily deals market.

That’s crucial, because as a first-mover in the industry, Fitbit has enjoyed unparalleled success, selling over 20 million devices to date.

But as markets mature and time passes, competition always heats up.

And increased competition is precisely what promises to undermine an investment in Fitbit.

Especially since Fitbit sells a commodity product. I mean, its devices are nothing more than sensors and software.

China’s Xiaomi realized this, and immediately pounced on the opportunity. Over the last year, it’s flooded the market with its $15 Mi Band. (By contrast, Fitbit’s fitness trackers are priced between $59 and $249.)

Sure enough, Xiaomi snatched a staggering 25% of the wearables market in the first quarter of 2015.

As a result, Fitbit’s market share has already fallen from 44.7% at the end of 2014 to 34% today. And further declines are all but guaranteed, as new entrants gain more market traction.

It’s not simply about competition from lower-cost devices, either…

h2 Breaking up the Band/h2

The risk of further market share erosion is far greater, because Fitbit’s entire product line could be consolidated as a feature in another product. Much like Garmin's (NASDAQ:GRMN) standalone GPS units were essentially consolidated into smartphones.

As Forrester Research technology analyst Julie Ask points out, “Nobody knows yet if these fitness wearables are sustainable or go the way of low-end digital cameras.”

But the data doesn’t bode well for Fitbit.

Very few people end up purchasing a second device. What’s more, nearly 50% of users end up abandoning their device in the first year.

If history is any guide, there’s a greater chance of fitness tracking becoming a feature within a larger product than remaining a standalone one. In that regard, the Apple (NASDAQ:AAPL) Watch looms as the biggest threat to Fitbit.

Bottom line: Don’t believe the hype. Fitbit is coming to market at the best possible time for its existing shareholders, not future ones.

The fact that insiders suddenly decided to sell more shares – 35% of the offering, compared to 25% previously – only reinforces my conviction. They’re cashing out while they can. Don’t be their bag holder.

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Written By: Wall Street Daily