Image source: Wikimedia Commons.
On the surface, these two companies look like polar opposites. Nike (NKE 0.88%) has been around since 1964 and has long been a stalwart in athletic clothing and footwear. The company is valued at over $84 billion. Fitbit (FIT +0.00%), on the other hand, isn't even 10 years old, and is valued at one-fortieth the size of Nike.
But there is one key thing they have in common: a focus on making wearable fitness a trackers an important tool for tomorrow's athletes and non-athletes alike. While Fitbit currently leads in market share, that alone doesn't make it a better buy.
What does determine the winner? While there's no clear-cut answer, there are a number of different ways to view the question.
Financial fortitude
"Why should I care about this? It's boring," you may claim. And I'd agree, the term "financial fortitude" rarely gets someone's heart pumping and imagination racing. But over the long run, financial fortitude matters a lot.
That's because companies with cash have options, and companies with lots of debt don't. If an organization runs into company-specific or macro issues that can hurt prospects, it has lots of choices if it has cash: outspending rivals into oblivion, acquiring them, buying back shares, or ever paying a dividend.
If a company has lots of debt, it's in the exact opposite situation -- in essence, struggling just to make ends meet and avoid bankruptcy.
Here's how these two stack up in terms of financial fortitude.
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
Fitbit |
$672 million |
$0 |
$114 million |
$148 million |
|
Nike |
$4.8 billion |
$2.2 billion |
$3.8 billion |
$2.23 billion |
Data source: Yahoo! Finance. Net income and free cash flow are presented on trailing-12-month basis.
Remember, Nike is worth about 40 times the valuation in Fitbit -- which explains why the numbers are so comparatively different. But if we peel away this layer, we see that both companies are actually quite fit, financially speaking.
Nike has a huge war chest, reasonable debt levels, and produces tons of free cash flow (FCF). Fitbit, on the other hand, is debt-free, and is also FCF-positive -- a very good sign for a company this size.
But at the end of the day, I can't help but give the nod here to Nike. It's hard to tell how a massive product "miss" or embarrassing recall could affect Fitbit's cash figures, while I find it hard to fathom where a huge dent could be made in Nike's balance sheet.
Winner: Nike
Sustainable competitive advantage
Perhaps no metric has been more predictive of my own investing returns than the sustainable competitive advantages of the underlying companies that I hold. Called a "moat" within investing circles, a company's sustainable competitive advantages are what make it unique.
Without a moat, competition can come in and mimic whatever is being done. With it, however, a company can remain successful for years on end.
Nike's key competitive advantages are its scale and brand power. Forbes estimates that the brand is worth almost $16 billion alone. That's not surprising when you consider just how ubiquitous the swoosh has become, and how valuable some of the company's products -- most notably the timeless nature of Michael Jordan shoes -- really are.
Fitbit, on the other hand, has a much smaller moat. It is the market leader in fitness trackers, but Nike and Garmin are quickly making inroads. In order to have a truly sustainable moat, the company needs to create an ecosystem that encourages people to stay with the Fitbit brand. Increasingly, co-founder and CEO James Park has been speaking about Fitbit as a healthcare company, not just a wearable technology company.
If Fitbit can truly make that transition -- and actually make our lives healthier as a result -- then it would have a formidable moat indeed. For now, however, that's just a vision, and there's a long way to go in making it a reality.
Winner: Nike
Valuation
Finally, we have the question of how expensive each stock is. While there's no single metric that can determine this, we can take a look at a broad swath of ratios to gauge what we're really paying for.
|
Company |
P/E |
P/FCF |
P/S |
PEG Ratio |
|---|---|---|---|---|
|
Fitbit |
12 |
14 |
0.9 |
1.4 |
|
Nike |
23 |
38 |
2.5 |
1.8 |
Data source: Yahoo! Finance, E*Trade, and Nasdaq. P/E is calculated using non-GAAP figures.
As you can see, on virtually every metric, Fitbit appears to be the better deal. That's not surprising after the company's stock fell by one-third after its holiday sales guidance was well short of what the investment community had been expecting.
Nike, on the other hand, has been performing well. That has led to a stock price that, while fair, would never be categorized as cheap.
Winner: Fitbit
Final call: Nike
So there you have it: Nike stock is higher-priced, but relatively safe. Fitbit is a riskier investment, but could pay off if the company can build a moat around itself. I personally own shares of Fitbit, but it's only a small percentage of my overall portfolio, to reflect that added risk.
