With its stock down about 90% since its 2015 IPO, fitness hardware-maker Fitbit (FIT) knew something had to change. They're betting services is the answer.
The company is launching Fitbit Premium, which will be a subscription service that offers users more information on their health, including fitness and sleep. The service will cost $9.99 per month or $79.99 per year, and will include a library of over 1,000 workouts, as well as insights gathered through users’ Fitbit device. Fitbit is targeting the recurring revenue, as well as stronger profit that comes from software.
Deutsche Bank analyst Jeffrey Rand is “encouraged” by Fitbit’s new service as it “appears to be a robust offering, including a strong focus on analyzing and improving sleep quality.”
The analyst maintains a Hold rating and $5 price target on the stock, which implies about 60% upside from current levels.
The company has a large user base of 27 million people, which will be tapped as a source of recurring, high-margin revenue. But while the move itself is smart, Rand reminds investors that “ramping up a subscription business...is typically a long process,” and does not expect much change in the near future.
The analyst estimates Fitbit needs to convert as much as 10% of users to its new service. By doing so, Rand believes subscription revenue could creep up to 10% of total revenue, which is “achievable, and could even move to a higher percentage of overall revenue.” But until then, the analyst assumes the rollout will be “a slow process.”
The subscription model and service-based offerings should serve Fitbit well in the long-term. As with many of its peers, Fitbit performs best in the holiday season, so a source of recurring revenue will provide more clarity for both management and investors. Furthermore, the shift to services will allow Fitbit worry less about upgrade cycles, which is a growing challenge for hardware makers. As hardware lasts longer, customers delay upgrading to new products, playing a part in lower or weakened revenue.
All in all, the word on the Street rings largely bullish on this wearable device maker, with TipRanks analytics demonstrating FIT as a Buy. Out of seven analysts polled in the last three months, four are bullish on FIT stock, while one remains sidelined, and two are bearish. With a return potential of over 60%, the stock's consensus target price stands at $4.99. (See FIT's price targets and analyst ratings on TipRanks)