Fitbit (NYSE:FIT) had an incredibly successful IPO on June 18, pricing at $20 a share and closing out its first day of trading nearly 50% over that price. Since then the stock has continued to surge, and is now more than double its IPO price, closing Friday at $47.17. But what is driving investor confidence that Fitbit will continue to grow into its high valuation?
How Fitbit sees 6x growth for fitness trackers
In Fitbit's prospectus filing for its IPO, the company reported that the wearable fitness tracking market is still rapidly expanding. According to International Data Corporation (IDC), consumer spend on wearable devices such as those Fitbit makes tripled in 2014 compared to 2013, growing faster than any other segment in the consumer electronics market.
Even more amazing is that IDC predicts the number of trackers shipped will jump from around 20 million in 2014 to over 120 million in 2019, representing more than sixfold market growth in just five years. Here's what Fitbit management believes is fueling growth in the connected health and fitness market.
- Individuals and employers are increasingly focused on health and fitness.
People's lifestyles becoming healthier (or at least more health-conscious) is only part of the trend. The other part is rising healthcare costs and the costs to employers of workers made unproductive by health-related issues. Therefore both individuals and employers are helping this market to grow further. A group called IBISWorld predicts that the corporate wellness industry will grow from $7.4 billion in 2014 to $11.3 billion in 2019.
- Advances in technology have enabled the emergence of connected devices.
Better technology has improved the size and accuracy of sensors, while lower-power components with longer battery life have helped Fitbit develop smaller, more power-efficient trackers that fit a wide range of consumer preferences and needs. Fitbit believes continued focus on technological innovation will help spur new growth.
- Mobile devices have become the preferred platform for accessing information.
On their own, many of the Fitbit models have screens to inform users about step counts, calorie consumption, heart rate, etc. However, Fitbit sees the connection with mobile phones as its own growth driver. By connecting Fitbit trackers to smartphones, the Fitbit app can become a health management tool taking advantage of long-term trends, allowing for challenges with friends, and integrating diet and other goals into the platform.
- More individuals are turning to technology solutions to improve health and fitness.
Related to the rise in mobile phones, technology in general (including the Fitbit mobile and desktop apps) is becoming a common tool to improve health and fitness through tracking and monitoring in new ways. According to The NPD Group, over 25% of U.S. consumers reported already using fitness apps.
Is FIT a buy now?
One reason Fitbit looks so attractive is that it currently holds a roughly 68% share of this wearable fitness tracker market. Fitbit shipped about 11 million units in 2014, which was enough to help revenue surge 175% over 2013 to $745 million. If the company can keep its market share up, then it is likely to see continued revenue growth as the number of devices it sells continues to multiply.
Even if Fitbit's market share drops in the face of competitors like Jawbone or Under Armour, evenselling only 50% of the expected 120 million fitness trackers to ship in 2019, that still represents massive growth potential for this new investment.
However, the company's growth potential has not been overlooked, and the shares are trading at around 90 times earnings. While the growth potential looks promising, competition for this market is going to be fierce as many competitors want to take their shares of that anticipated wearable fitness tracker market growth, including some low-cost options like Chinese hardware maker Xiaomi with its $15 fitness tracker.
When hot tech companies IPO like Fitbit has, breaking out as one of the most successful IPOs of 2015 so far, then their stocks get a lot of attention and investors often want to get in. Fast. But the stocks often pull back to more realistic valuations as the public gets to know them more. It might be worthwhile to wait for a better entry point into FIT.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.