W earable fitness device maker Fitbit has given investors a workout since it went public in June. The San Francisco-based company saw its initial public offering price at 20 a share and ended its first day of trading on June 18 at 29.68.Fitbit ( FIT ) shares climbed to a record high of 51.90 on Aug. 5 before taking a tumble. The stock currently trades near 37.
Investors are now trying to gauge Fitbit's prospects as it faces increasing competition from rival fitness trackers and smartwatches with fitness features.
"Fitbit has already proven that it can compete exceptionally well," Barclays analyst Matthew McClintock told IBD. It's secured a huge lead over other fitness band makers. Fitbit has even held its own in the market since the launch of the Apple Watch last spring, he said. McClintock rates Fitbit stock as equal weight with a 49 price target.
Market research firm IDC believes smart wearables like the Apple Watch will surpass basic wearables like Fitbit fitness bands in unit shipments by 2018.
IDC forecasts basic wearable device shipments to rise from 52.1 million units this year to 73.7 million in 2018, with year-to-year growth dropping from 120% to 3%.
By comparison, smart wearables are seen growing from 24 million shipments this year to 84 million in 2018, with year-to-year growth going from 360% to 27%, IDC says.
"Basic wearables will still grow, but in terms of market share, we see them declining in the long run," IDC's Jitesh Ubrani told IBD.
Fitbit focuses on being good at fitness applications rather than making multipurpose devices like smartwatches, McClintock says.
Low-cost vendors like Xiaomi are attempting to commoditize the fitness-tracker market, but consumers will see the difference between their generic gadgets and Fitbit's premium wearables, Ubrani said. Fitbit is differentiated by its software for tracking progress and its social media integration.
"Most people who have used a Xiaomi device realize how basic it is when compared to a Fitbit," Ubrani said. Xiaomi's wearable "doesn't have any of the frills that people have come to love from a device like a Fitbit."
Still, the existence of low-cost fitness bands, such as Xiaomi's $20 device, could put pressure on Fitbit and Jawbone to lower their premium-priced bands, which cost $100 or more, Ubrani said.
Sterne Agee CRT analyst Rob Cihra initiated coverage of Fitbit Monday with a neutral rating and price target of 45. He is positive on the company, but thinks the stock has a rich valuation.
"Fitbit is the market leader in health and fitness trackers, which help consumers monitor and analyze daily activity such as steps, sleep, weight, exercise and heart rate," Cihra said. "We believe Fitbit is currently scrambling to keep up with booming demand, but the market is early."
Fitbit describes its mission as making products to help people "lead healthier, more active lives by empowering them with data, inspiration and guidance to reach their goals."
In its first quarterly earnings report as a publicly traded company, Fitbit raced past views. In the June quarter, Fitbit earned 21 cents a share excluding items, up 133% year over year, on sales of $400 million, up 253%. Wall Street was expecting EPS of 8 cents on sales of $319 million.
For the September quarter just ended, analysts polled by Thomson Reuters expect Fitbit to have earned 9 cents a share excluding items on sales of $351 million. That compares with Q3 2014 EPS of 33 cents on nearly $153 million in sales.
Fitbit is spending heavily on a global multimedia campaign to drive awareness of its products ahead of the holiday shopping season.
Fitbit shares sold off after the company's Q2 report after the market closed on Aug. 5. Analysts expressed concern about Fitbit's declining profit margins. Fitbit's gross profit margin dipped to 47% in Q2 from 52% a year earlier.
By June 30, Fitbit had sold more than 25 million connected health and fitness devices since offering its first item in September 2009. Fitbit's products range from $60 for a basic clip-on activity tracker to $250 for its Surge GPS watch.
Growth drivers include international opportunities and penetrating the corporate wellness market.
The U.S. accounted for 72% of Fitbit's Q2 sales.
In the corporate wellness program market, Fitbit has signed deals with more than 50 Fortune 500 companies. Most recently, retailerTarget ( TGT ) said Sept. 16 that it will offer Fitbit activity trackers free to its 335,000 U.S. employees.
Corporate deals are less than 10% of Fitbit's revenue today but represent one of the company's fastest growing segments.
Another growth area is wearable devices in the health care industry, McClintock said. Doctors are starting to prescribe the devices to patients to monitor physical activity. Insurance companies could support fitness bands to encourage customers to be active.
Fitbit bulls point to the company's strong brand and ecosystem, the massive total addressable market for fitness wearables, low penetration rates and the corporate wellness opportunity.
Fitbit bears cite the increasing competition, the potential for smartwatches to take market share, and reports of high device abandonment rates and low engagement.
A survey released in August by Robert W. Baird & Co. found that 28% of all Fitbit owners either rarely or never use their devices. That percentage climbs to 46% for those who purchased their device 24 months ago or longer.
Fitbit is working on improvements to its software and services to increase user engagement.
"Fitbits have at least some degree of 'fad' to them, where simply looking at the company's own estimate of 'active user' data shows a decent number of units end up in a drawer," Cihra said. "But we think some of this is just the nature of personal fitness intent, similar to gym memberships started New Year's Day only to be left idle months later."