Fitbit (NYSE:FIT) recently introduced the Alta, a slim fitness band with a sleek minimalist display. The $130 device has all the activity tracking features of other Fitbit devices but adds Apple Watch-like reminders to get up and move. The Alta automatically recognizes exercises like walking, running, and dancing, so the user doesn't need to manually launch Fitbit's mobile app.
The Alta is Fitbit's second new device of 2016 -- the first was the $200 Blaze smartwatch, which was unveiled at CES 2016 in January to mixed reviews. This brings the total number of Fitbit's wearable trackers to eight -- the Zip, One, Flex, Charge, Charge HR, Alta, Blaze, and Surge. Will this scattergun strategy boost sales by reaching more customers? Or will these devices cannibalize each other and confuse customers instead?
Understanding Fitbit's strategy
Fitbit splits its wearables into three categories -- "everyday" devices which cost under $130, "active" devices which cost between $150 to $200, and "performance" ones which cost $250. During the third quarter, Fitbit claimed that 79% of its sales came from just three "premium" devices -- the $130 Charge, $150 Charge HR, and the $250 Surge.
That healthy demand for Fitbit's pricier devices indicates that cheaper fitness trackers haven't become a major threat yet. However, those three devices have slightly tighter margins than Fitbit's lower-end devices. That's why Fitbit's non-GAAP gross margin fell from 53.9% to 48.3% between the third quarters of 2014 and 2015.
Fitbit is trying to counter the Apple Watch's emphasis on luxury wearables with more fashionable designs. In its press releases, Fitbit described the Blaze as a "sleek, versatile timepiece that fits your personal style" and the Alta as a "fashion-forward fitness wristband". Those descriptions highlight a growing rift between Fitbit's utilitarian sports performance devices and its fashion-forward wearables. Like the Apple Watch, both the Blaze and Alta have interchangeable wristbands. Simply put, Fitbit likely believes that it can reach more consumers with prettier devices.
Will Fitbit cannibalize its own products?
To understand what can go wrong here, we should remember what happened to GoPro (NASDAQ:GPRO). Last year, the action camera maker doubled its product line from three cameras to six to boost sales. Unfortunately, newer devices were cannibalized by older favorites, and existing users stuck with their old cameras.
As a result, GoPro's 2015 sales only rose 16% for the full year -- a sharp decline from 41% growth in 2014 and 87% growth in 2013. GoPro recently announced that it would discontinue three of its low-end and mid-range cameras by April to "simplify" its product line. In other words, its attempt to reach more customers across every price tier backfired.
Fitbit and GoPro sell different products, but the flaws in their scattergun strategies are similar. The Alta costs the same as the Charge, but the Charge lacks smartphone notifications, automatic workout tracking (without the app), and reminders to move -- which basically render it obsolete. The fashionable Blaze costs $50 less than the utilitarian Surge, but the only major feature that it lacks is a GPS. These comparisons indicate that the Alta and Blaze could cannibalize the Charge and Surge, two of the company's best-selling products.
The road ahead
The Alta and the Blaze are sleek devices, but it's unclear if they can stand out in the increasingly crowded wearables market. If they fail to attract new customers and just cannibalize the company's own devices instead, Fitbit could continue to be labeled as a "one hit wonder".
Looking ahead, investors should see if these new devices boost shipments and widen the company's defensive moat. They should also keep an eye out for third-party teardowns of the Alta and Blaze, and see how much both devices impact the company's margins over the next few quarters. Lastly, investors should see if Fitbit suffers a GoPro-like breakdown in pricing and execution for these new offerings, which could cause major writedowns and undermine investor confidence.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and GoPro. 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.
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