Fitbit reported its 2017 second quarter earnings last week. Sales were down year over year and losses continue but lower than expected loss and its guidance for future breakeven made the investors bid up the stock. The day after they reported, the stock went up 15% but gave up a third of that gain the next day.
I am not a chartist but it is hard to miss this up and down trading pattern we have seen with share price over the past eight quarters. I first wrote about Fitbit’s lack of product market fit. It boils down to the basic tenets of marketing – who is the customer, why are they buying and what budget are they paying for it. This was my analysis as a marketer.
As an individual who is into fitness, eating right and measuring I also find fundamental problems with the claims like the focus on 10,000 steps. I also do not see their claims on healthcare benefits in their reported studies as defensible.
And I am neither long or short on the stock.
Now that we got that out of the way, I want you to take a closer look at the reported numbers to see if there is indeed some spring in its step. The data for these charts come from the company reports, they are indeed incredibly transparent in reporting many such metrics that you otherwise may not see in many other reports.
The first chart is the reported percentage of returning vs. new customers in their unit sales.
This is the last six quarters data on the percentage of sales to returning customers. As you notice a 40-60 split between returning and new customers. This does not look bad as businesses grow by finding and adding new customers. Except Fitbit has been known to boast its 90% market share and the number one position in wearables space (at least until last quarter). As I said, this is expected when sales are growin, which brings us to second chart.
The unit sales are not growing. As they significantly cut marketing spend, the sales dropped. There is no inherent momentum or power of installed base that is carrying the sales forward.
Finally to add a different aspect to this concern I present the third chart which shows what percentage of past customers are returning. This assumes a 12-month refresh cycle and calculates the share of current sales were to those upgrading. This is an important metric on customer retention and reducing future marketing expenses for customer acquisition. More importantly, this is also an indication of product delivering on its value promise.
For better comparison, I overlay this 12-month upgrade percentage to chart 1. As you can see this number is dropping significantly. For the past 3 quarters less than one in five of past customers who bought a device 12 months before that period are coming back. There is no loyalty or stickiness.
Given that their sales have considerably dropped in the past four quarters, the low returning rate points to smaller and smaller contribution to future sales meaning the need to find new customers at higher cost.
At this point everyone who wants a Fitbit device in their sock closet have one. And anyone who wants a $300 smart watch would rather buy third generation products from Apple, Samsung, Garmin and the rest.
It appears not many steps left to take.