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On the surface, it might appear that Under Armour (UAA +1.96%) (UA +1.91%) and Fitbit (FIT +0.00%) don't have much in common. While both focus on fitness, the former makes wicking apparel while the latter focuses on electronics.
But the futures for both are closely intertwined via wearable technology. While Fitbit is a more obvious example of this burgeoning niche, Under Armour has several irons in the wearable technology fire, including its Healthbox Fitness Tracking System.
But which company's stock is a better deal today? There's no way to answer that question definitively, but there are different approaches we can take to the issue. Below are the three lenses that I consider to be vital in determining the investment-worthiness of one company over another.
Financial fortitude
While cash in the bank is pretty boring, it can make the difference over time. Every company will, at some point, encounter difficult times. Those with cash on hand have a litany of options -- outspend rivals, buy back stock, or even make acquisitions -- while those with heavy debt loads are forced to focus almost exclusively on making ends meet to avoid bankruptcy.
Here are how these two companies stack up in terms of financial fortitude.
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
Under Armour |
$180 million |
$797 million |
$200 million |
($207 million) |
|
Fitbit |
$672 million |
$0 |
$99 million |
($56 million) |
Data source: Yahoo! Finance. Net income and free cash flow presented on trailing-12-month basis.
Currently, Under Armour is valued at almost six times the size -- via market capitalization -- of Fitbit. And yet, Fitbit clearly has the stronger balance sheet. While I'm not encouraged by the fact that both companies are free cash flow (FCF) negative, Fitbit is definitely in a healthier position with absolutely zero debt.
In fact, the company is benefiting from that zero-debt situation right now. Holiday estimates for the company are well below what many were expecting -- due to a combination of weak demand and supply chain issues -- but management doesn't have to worry about meeting debt obligations, and can instead focus squarely on fixing its problems.
Under Armour has taken on a lot of debt to increase inventory and develop its next generation of wearable technology products. While that move could definitely pay off in the long-run, it renders it more fragile in the short run.
Winner = Fitbit
Sustainable competitive advantages
In my eight years of investing, no variable has been more important to the success of my positions than the sustainable competitive advantages of the underlying companies. Often called a "moat" in investing circles, the essence of this is the "special sauce" that differentiates a company from its competition.
For Under Armour, the company's brand provides its strongest moat. What started out as an upstart athletic clothing company has morphed into a player in everything from jerseys to shoes. While the foray into wearable technology may add high switching costs -- all of someone's health data could be on their platform -- that is not a significant factor right now.
Fitbit, on the other hand, is trying to build a similar platform that introduces high switching costs. While the company is the far-and-away leader in fitness tracking, it currently doesn't have any real moat. Garmin (GRMN +4.63%) and Misfit, a subsidiary of Fossil (FOSL +8.33%), are already players within the industry. If Fitbit isn't able to develop an ecosystem for its products, the possibility for a moat may soon vanish.
Because of the power of Under Armour's brand, it wins this round.
Winner = Under Armour
Valuation
For the tie-breaker today, we have to see how expensive each company is. Here are some of the data points I like to consult when determining how expensive a stock is.
|
Company |
P/E |
P/FCF |
P/S |
PEG Ratio |
|---|---|---|---|---|
|
Under Armour |
53 |
N/A |
2.5 |
2.5 |
|
Fitbit |
11 |
N/A |
0.8 |
1.2 |
Data sources: Yahoo! Finance, Nasdaq.com, E*Trade. P/E reflects non-GAAP earnings
As with the first lens we used, Fitbit is the runaway leader here. The fact that the company's shares have fallen so much since its holiday forecast was released makes the company look like a steal.
It should be noted that if the company can't build a moat, it might not be cheap at all. But if we give management the benefit of the doubt -- and why not, given that it's a founder-led enterprise, with insiders owning 82% of the company's voting power -- then the company could be very cheap.
Winner = Fitbit
Final call -- Fitbit
So there you have it. Under Armour undeniably has the wider moat, and that's important. But Fitbit has both a better balance sheet and a more attractive price right now. While I personally own shares of both, you can see how a legitimate argument could be made that Fitbit is the better deal right now.
