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Better Buy: Fitbit Inc. vs. Apple

By Andrés Cardenal - Apr 18, 2016 at 2:24PM

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The wearable-computing revolution is offering tremendous potential. Which companies will profit the most from it?

Image source: Apple.

Wearable computing is a promising industry offering enormous opportunities over the long term. However, we're still in the first stages of the wearable-computing revolution, and it's hard to tell what kinds of products, platforms, and companies will be the big winners in this space.

Fitbit (FIT) is achieving impressive success with its basic health and fitness oriented devices, while tech juggernaut Apple (AAPL 0.11%) is betting on Apple Watch to open new growth venues in smartwatches. 

Which one is a better buy right now: Fitbit or Apple?

Fitbit for growth potential
Fitbit is a pure play on wearable devices, and the company is remarkably small in comparison with Apple: Fitbit has a market capitalization value around $3.5 billion versus a gargantuan $609 billion in market capitalization for Apple. That means Fitbit is just 0.6% the size of Apple, which has major implications in terms of potential returns. Being a much smaller business, it's relatively easier for Fitbit to deliver big gains for investors if the company plays its cards well.

Based on data for the fourth quarter of 2015, Fitbit sold 8.2 million connected devices during the quarter, and the company ended the period with 16.9 million active users, a strong 152% increase versus the fourth quarter in 2014. Total revenue during the quarter jumped 92% to $712 million, and the business is also reasonably profitable. Operating margin was around 16% of sales last quarter.

The company recently launched its new Fitbit Blaze and Fitbit Alza products. Blaze is a sports watch focused on health and fitness tracking and sells for $199. This is Fitbit's most sophisticated product, and probably the one that comes closest in terms of pricing and quality to Apple Watch, which sells for a starting price of $299. Fitbit announced on March 31 that it sold more than 1 million Blaze devices in the first month of availability, exceeding the company's own internal forecasts.

However, even if Blaze is off to a strong start, whether Fitbit can make the full jump from activity trackers to smartwatches still remains to be seen. A smartwatch needs to be able to connect and interact with a full ecosystem offering a wide variety of functionalities, and Apple is considerably ahead of Fitbit in this area.

Apple for soundness and quality
Apple doesn't disclose sales figures for Apple Watch. The device is included in the "other products" category in financial statements, which also covers Apple TV, Beats products, iPod, and Apple-branded third-party accessories. According to estimates from IDC, Apple is expected to ship 14 million devices in 2016, a number that would represent a leading market share of 49.4% in the smartwatch industry.

Apple said in the last earnings conference call that it expanded distribution of Apple Watch to almost 12,000 locations in 48 countries. Revenue in the "other products" category grew by a strong 62% during the quarter, which the company attributed to record sales of both Apple Watch and Apple TV.

However, the "other products" category still represents a modest 6% of total revenue for Apple, while almost 70% of the company's sales come from the iPhone. Even if Apple Watch sales grow rapidly over the coming quarters, the product won't move the needle by much from a financial perspective.

That's not to say that Apple Watch isn't important for Apple. If the company can prove to investors that it still has what it takes to successfully innovate and disrupt new product categories, it could do wonders for Apple stock, as it would dissipate concerns about the company's ability to sustain growth over the long term.

Fitbit or Apple?
If demand for wearables remains strong in the coming years, and Fitbit manages to capture a considerable share of that growth, then Fitbit stock could materially outperform Apple. However, if things don't go as expected because of disappointing demand or increasing competitive pressure, investors in Fitbit could take a big hit.

If Apple Watch fails, it could be a disappointment for investors in Apple, but hardly a reason to panic, since the impact on sales and earnings would be quite modest. When it comes to risk, Apple is a much safer bet than Fitbit.

Apple is one of the most valuable brands in the world. There are now over 1 billion devices in the company's installed base, and Apple customers are consistently loyal to the brand. The company differentiates itself from the competition with its deep focus on design, and this is a crucial competitive strength in wearables. In addition, Apple has enormous financial and strategic resources to invest in all kinds of technologies, so the company is in a position of strength to profit from growing demand for wearable devices over the years ahead. 

Investors who believe Fitbit will deliver sustained growth in the coming years should probably bet on the company, since Fitbit stock offers substantial upside potential under such a scenario. On the other hand, if you want a solid and reliable tech powerhouse with a considerable chance of capitalizing on the wearables revolution, then Apple is the way to go. 

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