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Good News for Apple and Fitbit: Smartwatch Adoption Is Still in the Early Innings

By Evan Niu, CFA – Updated Apr 16, 2019 at 11:03AM

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Just 16% of U.S. adults own a smartwatch.

Apple (AAPL 0.24%) and Fitbit (FIT) have emerged as the two clear market leaders in smartwatches, with Apple Watch leading the way but Fitbit's growing portfolio of smartwatches helping it secure the No. 2 spot while simultaneously driving a turnaround for the smaller company. Meanwhile, Alphabet (GOOG 0.83%) (GOOGL 0.73%) subsidiary Google has ceded share, although the search giant is expected to jump in directly with a first-party Pixel Watch in the near future. Rumors of the company's foray into the market were only fueled by recent news that Google acquired smartwatch tech from Fossil and is hiring for wearables design and engineering execs.

Here's some good news for current and prospective smartwatch vendors: Adoption is still very much in the early innings.

Close-up view of gold Apple Watch Series 4

Apple Watch Series 4. Image source: Apple.

The smartwatch market is booming

Market researcher NPD today released some fresh estimates on the U.S. smartwatch market, showing that smartwatch revenue in the 12 months ending November 2018 surged 51% compared to the same time period a year ago, hitting almost $5 billion. Unit sales were up by an impressive 61%, suggesting that pricing is coming down on average.

Apple leads the way, but when combined with Samsung and Fitbit, the top three vendors represent 88% of smartwatch unit sales, according to the report. Other players like Fossil and Garmin are carving out places for themselves, but they don't command the same volumes. Adding cellular connectivity has indeed proven to be an important sales driver, freeing devices from having to rely on paired smartphones for connectivity.

"Over the last 18 months smartwatch sales gained strong momentum, proving the naysayers, who didn't think the category could achieve mainstream acceptance, had potentially judged too soon," NPD analyst Weston Henderek said in a statement. "The ability to be truly connected via built-in LTE without the need to have a smartphone nearby proved to be a tipping point for consumers, as they now recognize the value in being able to complete a wide range of tasks on the device including receiving notifications, messaging, accessing smart home controls, and more."

Fitbit Versa laying next to accessories

Fitbit Versa. Image source: Fitbit.

NPD's estimates find that roughly 16% of U.S. adults now own a smartwatch, up from 12% in December 2017. That's meaningful progress in overall adoption, while still representing considerable upside, as more consumers will get on the smartwatch bandwagon in the years ahead. That ownership is concentrated in younger demographics, with the 18-to-34 age group reporting the highest level of ownership. NPD expects that older consumers will soon start to adopt smartwatches in greater numbers as manufacturers continue incorporating more and more health-centric features, particularly Apple.

The latest Apple Watch Series 4 added an ECG function, as well as fall detection -- features that provide greater value for older demographics. Apple also continues to invest heavily in its digital health platform, and CEO Tim Cook recently predicted that Apple's "greatest contribution to mankind" will eventually prove to "be about health."

Check out the latest Apple earnings call transcript.

There's more where that came from

Apple has never shared official Apple Watch metrics with investors but said last month that wearables revenue grew nearly 50% last quarter and is approaching the size of a Fortune 200 company. The threshold to be a Fortune 200 company in 2018 was $14.6 billion. Smartwatches have been instrumental in Fitbit regaining its financial footing, with its yearslong pivot to full-featured smartwatches finally paying off. Smartwatches represented 49% of Fitbit's total revenue in the third quarter.

Plenty of U.S. consumers have yet to buy their first smartwatch, so there are plenty of fish still in the sea.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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