Image source: Fitbit.
The worlds of Apple (AAPL 1.30%) and Fitbit (FIT +0.00%) seem to be colliding a lot these days, even if it's just the smaller of the two that's crashing and burning. Apple and Fitbit didn't have a whole lot in common beyond health-monitoring apps on iPhones until the class act of Cupertino introduced the Apple Watch in the springtime of 2015. The move thrust Apple into the realm of wearable tech that Fitbit was dominating.
Fitbit didn't shy away from the matter. The leading maker of fitness trackers threw its hat into the smartwatch ring with last year's introduction of Fitbit Blaze. Apple also raised the stakes later in the year when it rolled out the Apple Watch 2, complete with GPS and improved water resistance. The new features made Apple's updated smartwatch more attractive to runners and swimmers, folks that historically gravitated to Fitbit's activity-tracking wristbands. Apple also recently began aiming for the corporate wellness market, a space that Fitbit has started to thrive in lately.
The battle lines appear to be drawn, but the irony here is that Fitbit products remain very popular with Apple fans. Fitbit's mobile app raced up Apple's App Store chart -- trailing only Super Mario Run -- in the days following Christmas last month, implying that Fitbit trackers were popular holiday gifts. Even with the second generation of Apple Watch filling up stockings the love for Fitbit in iOS-fueled circles remains strong. Fitbit didn't fare nearly as well on the app marketplaces for rival Android smartphones.
It's a whole new starting line
The popularity of Fitbit products with iPhone owners may suggest a harmonious balance between the two companies, but what if you could only invest in one stock? Would you buy shares of Apple or Fitbit?
We know who the winner of 2016 was between the two investments. It wasn't even close. Shares of Apple rose 10% last year, a modest gain but a welcome break for Fitbit stock's 74% plunge. However, the real question is which stock will provide the best return for 2017 and beyond. The answer isn't obvious.
Apple offers a history of innovative bar-raising and market-defining ingenuity. It trades at a reasonable 14 times trailing earnings and an attractive 13 times Wall Street's bottom-line target for the current fiscal year. Apple also shells out a decent dividend, translating into a current yield of 1.9%.
Fitbit doesn't pay out distributions, and it's also in a funk. Revenue growth has slowed dramatically, and the competitive nature of the fitness tracker market has squeezed margins. In a sobering metric, Fitbit's stock is trading for seven times 2015's profit, 17 times trailing earnings, and just 11 times this new year's projected profit.
Eyeing top-line multiples, Apple fetches an enterprise value-to-sales ratio of 3.0. That's a lot higher than Fitbit's multiple of 0.4, but that's also a testament to Apple's higher-margin business and Fitbit's current margin-munching challenges.
The lower forward multiples belong to Fitbit, but that also discounts the risks. Neither company is at the top of its game. Both companies are expected to have posted revenue growth in the low single digits during the holiday quarter, though Apple is expected to rebound to 7% top-line growth for all of fiscal 2017.
Drawing the line
Fitbit faces a longer road to get back on track, but we've seen how a hit product can spur a revival in either company. Apple is widely expected to make this year's iPhone a substantial update given this summer's 10th anniversary of the product's debut. Fitbit has been acquiring wearable tech pioneers in a move that could redefine its niche.
I own both stocks, and I wouldn't own them if I didn't think that both Apple and Fitbit were positioned to beat the market this year. However, deciding on the ultimate victor really depends on an investor's risk tolerance. Conservative investors don't need to go beyond Apple. It's attractively priced, pays a respectable dividend, and since every few years it seems to roll out a hit new product it's easy to get excited. The ceiling may not be as high as Fitbit if it's able to turn things around -- the downside of commanding a $630 billion market cap -- but the floor is also steadier.
Fitbit would be the choice for risk-tolerant investors. Whether 2017 product rollouts resonate with consumers or more corporations subsidize Fitbit trackers for employees to lower health coverage costs there are catalysts for a pop. Fitbit also remains a prime buyout candidate, something that obviously doesn't factor into the upside potential at Apple.
