Fitness tracker maker Fitbit is looking to raise at least $100 million in its upcoming IPO. The number of shares and price haven't been disclosed yet, so we don't know its potential market valuation yet, but the growth numbers revealed in its S-1 filing are impressive. 

Last quarter, Fitbit's revenue rose 144% year-over-year to $337 million as net income surged 441% to $48 million. It sold 10.9 million devices in 2014 -- up from 4.5 million in 2013 -- and controls 62% of the U.S. fitness tracker market, according to NPD. Fitbit's paid active users, who pay $50 annually for its digital trainer and premium reports, rose from 600,000 in 2012 to 9.5 million last quarter.

Fitbit's wearables. Source: Fitbit.

However, the rise of smartwatches with comparable health-tracking features could soon throttle Fitbit's growth.

Cheap smartwatches, like the $89 Pebble Watch, are already packed with fitness tracking features. Meanwhile, the Apple (NASDAQ: AAPL) Watch, Samsung's (NASDAQOTH: SSNLF) Gear watches, and Google's (NASDAQ: GOOG) (NASDAQ: GOOGL) Android Wear devices could all shut Fitbit out of the higher-end market. Before opening up their wallets for the offering, investors should fully understand the future of the wearables market.

Stuck in a shrinking market
The wearables market is split into three main categories: fitness/activity trackers, sports performance devices, and smartwatches.

Fitbit and Jawbone belong to the fitness tracker market. Garmin (NASDAQ: GRMN), TomTom, and Under Armour (NYSE: UA) all sell pricier sports performance wearables, which usually emphasize function over form, for hardcore athletes. Meanwhile, feature-rich smartwatches like the Apple Watch and Samsung's Gear S are now offering "good enough" health-tracking features for average consumers.

Some analysts believe that it's only a matter of time before low-end smartwatch makers like Pebble cannibalize the fitness tracker market. This chart, based on data from Generator Research, shows how much the basic fitness tracker market could shrink over the next five years:


Fitness trackers

Sports performance


2015 revenue

$2.3 billion

$2.2 billion

$17.2 billion

2020 revenue

$527 million

$2.9 billion

$154 billion





Source: Generator Research.

Fitbit recently launched its own smartwatch, the Fitbit Surge. However, Forrester Research analyst Julie Ask recently told CNBC that smartwatches "will not be (Fitbit's) strength" and that most sales will still come from basic fitness trackers like the popular Fitbit Flex.

Fitbit acknowledges these risks
In the "Risks Factors" section of Fitbit's S-1 filing, the company names Apple, Samsung, Google, LG, and Microsoft (NASDAQ: MSFT) among its chief competitors. 

Fitbit notes that these rivals "have significant competitive advantages," including better brand recognition, deeper pockets, and more established relationships with customers, suppliers, and contract manufacturers. Fitbit also admits that these rivals could leverage their sales and marketing expenses across a broader portfolio of products and services, and use their own app ecosystem to promote wearable devices.

Lastly, Fitbit states that its competitors could "aggressively discount their products and services in order to gain market share." The market is already full of fitness trackers under $50 like Misfit's Flash, but Fitbit's cheapest device, the Zip, still costs $60.

Misfit's $100 Shine. Source: Misfit.

Fitbit's murky future
Fitbit is an early leader in a fledgling market. But now that the Apple Watch has arrived, other big players will double down on the smartwatch market by piling on more features at lower prices.

Research firm IDC forecasts that worldwide smartwatch shipments will soar from 4.2 million in 2014 to 25.7 million this year. It expects the Apple Watch to account for 62% of that market, with other players like Samsung and Pebble accounting for the rest. But as for cheaper fitness trackers, NPD analysts believe that U.S. sales will peak at 32 million devices next year and start fading.

In my opinion, Fitbit might counter that trend with three strategies. First, selling "high-end" fitness trackers could help it sidestep a pricing war with low-end rivals like Misfit. That's why it partnered with designer Tory Burch to launch high-end accessories for the Fitbit Flex. Second, products like the Fitbit Surge could carve out a niche between sports performance devices and full-featured smartwatches. Third, its ecosystem of paid users could keep growing and reinforce brand loyalty.

Tory Burch accessories for the Fitbit Flex. Source: Fitbit.

How Apple and others could crush Fitbit
The Apple Watch is both a blessing and a curse for the wearables market. On one hand, it could turn health-tracking smartwatches from niche devices into mainstream ones. That would open the doors for other companies like Samsung and Google to respectively sell more smartwatches or build bigger ecosystems.

But on the other, the smartwatch market could follow the same growth trajectory as the smartphone -- Apple will rise to the top with a "premium" device, while other players commoditize the rest of the market with competing low-margin devices. That battle, which will combine fitness trackers and cheap smartwatches into one market, could cause Fitbit's sales to slow down and margins to contract, poor prospects for a company going public.