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Fitbit files for an IPO – complete with real profits

Aaron Pressman

Famed venture capitalist Marc Andreessen has said that software is eating the world, but for start-ups there may still be a few opportunities in hardware.

Fitbit, one of the leading makers of fitness-tracking wristbands, filed to go public on Thursday, planning to raise $100 million. And its financial results in recent years stand out for one significant reason. Sure, the company increased its revenue almost ten-fold in just two years, hitting $745 million last year from just $76 million in 2012. And it’s dominating its market niche, with a 68% share by dollars of the fitness tracker market, according to NPD.

But it’s the bottom line, for a change, that drew all the attention in the Thursday IPO filing. After losing money in the early years, San Francisco-based Fitbit turned a profit of $132 million last year and $48 million alone in the first quarter of 2015. And it’s not a sort of funny profit that excludes the cost of stock compensation, acquisitions, or other kinds of expenses that tech start-ups like to overlook when they report “adjusted” net income.

The profits start at the start – Fitbit sold almost 11 million of those plastic fitness tracking bands last year for a lot more than it paid to make them. Devices range from around $60 for the Zip to $129.95 for the Aria smart scale. The company’s gross margin hit 48%. As a point of reference, Apple’s (AAPL) gross margin was almost 39% in its most recent fiscal year.

The filing also brings to mind one of last year’s more successful IPOs, also from a hardware maker with a popular branded product for consumers: GoPro (GPRO).

The camera maker went public in June at $24 a share after showing an almost four-fold revenue rise in two years and an annual profit the year before going public of $61 million thanks to a gross margin of 37%. Its shares shot up to almost $100 within a few months and have since fallen back to just under $50, still double the IPO price.

That fallback came as competitors like inexpensive Chinese smartphone maker Xiaomi announced much cheaper knock-off cameras.

It all brings to mind the tech mantra of legendary leader Jeff Bezos, who is fond of saying that a competitor’s profit margin is his opportunity.

Just as GoPro, and even Apple for a few years there, faced competition from lower-priced device makers in Asia, Fitbit also faces the challenge of future knock-offs. And, at the other end of the market, Fitbit also faces the problem of consumers turning to more expensive products incorporating fitness tracking, such as Apple's new smartwatch.

What some investors fail to appreciate is that consumer hardware isn’t simply a commoditized race to the bottom. Consumers value brands, value the ecosystem of accessories and programs around hardware, and they value the software and user experience inside the hardware.

So, maybe in the end, Andreessen is correct. Fitbit will need great software and a great ecosystem to stay on top.