Editor's note: A previous version of this article incorrectly identified the entire community of active Fitbit users as paid subscribers. The article has also been updated to correctly state that GoPro is estimated to control 70% of the U.S. video camera market.
Last June, action camera maker GoPro (NASDAQ: GPRO) went public for $24 per share. The stock subsequently went on a roller-coaster ride to over $90 per share before cooling off in the low $50s. A year later, fitness band maker Fitbit (NYSE: FIT) went public for $20 per share and has already more than doubled to over $40.
GoPro and Fitbit sell different products, but they share many similar characteristics. Let's take a look at how their business models overlap and which stock is a better buy at current prices.
Two shared strengths
GoPro and Fitbit respectively have the "first mover advantage" in action cameras and fitness trackers. As a result, GoPro controls 70% of the U.S. video camera market, according to NPD, while Fitbit claims that it controls 85% of the U.S. fitness tracker market.
GoPro and Fitbit both use social networks to promote brand loyalty. GoPro relies on the GoPro Channel, which hosts user-created and professional content on YouTube, Roku, and other platforms. It has over 3.1 million subscribers on YouTube alone.
The Fitbit mobile app allows users to compete against friends or share their progress on social networks like Facebook and Twitter. Active users, including those who pay $50 annually for digital trainer and premium reports or pair certain devices with their Fitbit accounts, climbed from less than 600,000 in 2012 to 9.5 million last quarter.
One shared weakness
Both companies also share a common weakness: low competitive barriers. Since GoPro and Fitbit started gaining momentum, low-end rivals have flooded the market with comparable devices. Xiaomi, for example, recently launched a $13 fitness bracelet and a $65 action cam. By comparison, Fitbit's cheapest model, the Flex, costs $100, and GoPro's entry-level Hero costs $130.
To counter the competition, GoPro and Fitbit are both launching devices at multiple price tiers for different users. GoPro sells a variety of cameras between $130 to $500, while Fitbit sells a wide range of fitness bracelets, clip-on wearables, and basic smartwatches between $60 and $250.
Top and bottom line growth
Both GoPro and Fitbit have impressive top and bottom line growth. Last quarter, GoPro revenue rose 54% annually to $363 million as its net income surged 98% to $17 million. Fitbit revenue soared 209% annually to $337 million as net income rose 441% to $48 million in the first quarter. If those growth rates remain consistent, Fitbit could soon generate more sales and profits than GoPro.
Last quarter, over half of GoPro revenue came from overseas markets. Sales of its action cams in Europe and Asia surged 66% annually, compared to 44% growth in the Americas. By comparison, just over a fifth of Fitbit sales came from overseas markets last quarter. This means that GoPro has more exposure to higher-growth overseas markets, but a strong dollar could also hurt GoPro more.
Margins and valuation
Both companies had comparable gross margins last quarter -- GoPro rose from 41% a year earlier to 45%, while Fitbit climbed from 41% to 50%. Investors should keep an eye on those figures for indications that GoPro and Fitbit are being forced to squeeze margins to defend against competing devices.
Meanwhile, GoPro operating expenses surged 77% and accounted for 39% of revenue, while at Fitbit, they climbed 174% and claimed 24% of sales. Neither company's expenses are eating into profits yet, but they could continue rising with new product launches and aggressive marketing.
In terms of valuation, however, GoPro's trailing price-to-earnings ratio of 58 times is considerably cheaper than Fitbit's 90 times. Suffice it to say that neither of these stocks are cheap.
Looking ahead, GoPro plans to launch mounts for filming virtual reality content and consumer drones for aerial photography. Both product categories could feed more content into the GoPro Channel, which doubles as a viral promotional tool. The company is also planning to launch a cloud platform for automatic uploads, which should make it easier to edit and share content across social networks.
Fitbit's future depends on three things. First, it must tether its mobile app ecosystem to more fitness apps and users, even as Apple and Google respectively expand their native fitness tracking ecosystems with HealthKit and Fit. Second, its partnership with Tory Burch, which designs high-end accessories for the Fitbit Flex, could preserve its premium appeal against low-end challengers like Xiaomi and Misfit. Lastly, Fitbit must escape the commoditized fitness tracker market by launching higher-end smartwatches.
The winner: GoPro
Both GoPro and Fitbit share common strengths and weaknesses, but GoPro is the better buy today. The stock has a cheaper valuation, and the company has a more ambitious game plan for future growth. Fitbit has spectacular top and bottom line growth, but I am not fully convinced that it can survive the commoditization of the fitness tracker market and the expansion of native OS fitness ecosystems.