The maker of UP fitness trackers has filed a lawsuit alleging that several of its employees took sensitive information about the company’s “supply chain, gross margins, product lineup and market predictions” with them after they were recruited by rival FitBit.
Jawbone names FitBit and five of its former employees in the lawsuit. It’s seeking an unspecified amount of damages in the suit and is also pursuing an injunction preventing those former employees from disclosing any more of its secrets.
As the pioneer and leader in the connected health and fitness market, Fitbit has no need to take information from Jawbone or any other company. Since Fitbit’s start in 2007, our employees have developed and delivered innovative product offerings to empower our customers to lead healthier, more active lives. We are unaware of any confidential or proprietary information of Jawbone in our possession and we intend to vigorously defend against these allegations.
Perhaps the most telling aspect of the lawsuit is that it comes shortly after FitBit announced that it’s hoping to raise around $ 100 million from an initial public offering expected to be listed on the New York Stock Exchange later this year.
One company is going public. Another is said to be struggling to raise venture capital in the frothiest times since the original dot-com boom. Even if there is merit to Jawbone’s claims, the suit’s timing makes it seem opportunistic at best.
It’s getting to the point where, when a technology company files for an IPO, the first question asked is, Why would you? As if the act itself is an admission of mediocrity or of belonging on a second or third tier.
So far this year, most of the well-known tech names that have listed on public markets have done so with losses: Box, GoDaddy, Etsy. The first two had been expected in 2014 but delays pushed their offerings back to this year. Etsy and Box priced their IPOs below their last round of private financing. All three have since mostly traded below their first-day closing prices. These are not exactly textbook examples of ideal IPO candidates, but in this well-lubricated market they slipped in.
Next up is FitBit, the maker of wearable activity trackers that filed its S-1 a week ago. FitBit’s financials are an entirely different story. Fitbit swung from a $ 9 million loss in 2013 to a $ 158 million profit last year, a year when its revenue nearly tripled to $ 745 million. The trendy if problematic neologism “unicorn” refers to companies valued at more than $ 1 billion. Shouldn’t there be a less-than-mythical species we can use to signify a private tech company that makes a billion in revenue in a year?
From the looks of it, Fitbit will earn such a title soon. Revenue in the first quarter of 2015 rose 209 percent to $ 337 million and net income surged to 33 cents a share from 6 cents a share a year ago. This represents a run-rate (that is, multiply that quarterly figure by four, and pray for sustained if not higher growth) of $ 1.3 billion in revenue and a net income of $ 1.32 a share. Both of those figures would put it on par with what GoPro, another wearable maker, recorded in 2014.
GoPro has a market cap of $ 6.7 billion. It’s quickly become a speculative darling, with a P/E of 37, mostly because it’s persuaded investors it can expand its business beyond its wearable cameras. Fitbit aims to use the bulk of its IPO proceeds in R&D and possibly acquisitions. And here is where the IPO stigma comes in: Can Fitbit come close to sustaining its current growth?
That is, can Fitbit keep its torrid, triple-digit growth rate going in the next few years? Of course it can’t. But can it come close to doubling while keeping profit margins close to their current levels? Gross profit last quarter was equal to 50 percent of Fitbit’s revenue, while operating profit was equal to 27 percent. That is admirably high for a tech company that started out in hardware.
The bearish case against Fitbit is this: Fitbit has seen its best growth already, and so it’s going public at its peak. While Box and Etsy are (in theory) investing IPO proceeds into future profits, Fitbit’s profits may soon hit a ceiling. The fitness-tracking market has so far been a niche, and it feels like a fad – one like eBay in 2004 or Groupon in 2011 that offered burgeoning growth early on and found the companies struggling for new markets one the fad burned out.
Fitbit sold 10.9 million devices last year, with another 3.9 million sold so far in 2015. It had 6.7 million “paid active users” in all of 2014 and 9.5 million of them in the first quarter. But this is what happens when a company invents its own metrics. “Paid active users” is anyone who, among other qualifications, “logged at least 100 steps with a health and fitness tracker.” 100 steps! Most couch potatoes log that wandering to and from the fridge in the course of a football game.
No wonder some skeptics are questioning this deal. Forrester, for example, argues the company is at “a possible peak,” citing the threat an Apple Watch poses, as well as the possibility that Fitbit’s can’t scale faster than the commoditization of health data. Fitbit may have been an early leader in its market but other, better financed rivals have quickly crowded in, whether through higher-end trackers or smart watches offering Fitbit-like tracking: Apple, Garmin, TomTom, Pebble, LG, Samsung, and more.
In Fitbit’s defense, the company has a history of thriving against all odds. Founded in 2007, Fitbit scrambled for years to raise money for a hardware company. It managed to raise $ 66 million in four rounds, a modest sum for a company that reported a $ 132 million profit last year.
An in-depth look at Fitbit on Rockhealth.com noted its robust growth and history of defying the odds, but also found “a serious problem with retention and a limited ability to engage customers over the long-term.” That risk seems especially acute given fitness trackers in general have yet to prove they can measurably improve their users’ health.
All this could easily add up to another health fad. The people in my social feeds who used to faithfully post their fitness exploits have stopped, probably because their friends quickly grew bored. I suspect fitness trackers are ripe for disruption from a technology – we call it the mirror – invented maybe 6,000 years ago. Who needs a data-mining wearable to motivate them to get off their ass when a glimpse of one’s unadorned body is so viscerally persuasive? Digital data, in fact, is probably a distraction here.
Which brings us back to the question of why a tech company goes public in 2015. Box and GoDaddy were ushered into the public markets under pressure from their investors. Etsy went public, in part, to help share its success with the community of sellers who helped build it. And FitBit?
Fitbit is on track to surpass $ 1 billion in revenue this year, with handsome profits. It had $ 238 million in cash on March 31, although the repayment since then of a $ 160 million loan left it with about $ 78 million. It’s been generating healthy cash flows, though – $ 19 million in 2014 and $ 33 million last quarter.
The tricky part got Fitbit comes next year. What happens if the health-tracking fad ends? How can it compete if a crowded market loses consumer allure? Box may be seeing growing losses, but it’s made a case that its IPO proceeds could establish a foothold in an industry that will grow for years. Fitbit’s growth strategy as outlined in its prospectus is uncertain and vague: “introduce innovative products,” “introduce new features and services,” “penetrate the corporate wellness market.”
Corporate wellness? Great. Only 100 steps to that meeting you’re dreading and you can become one of Fitbit’s active users. Fitbit is – from a financial perspective – the strongest tech IPO we’ve seen so far in 2015. The risk is it may well be the Foursquare of health tracking – a company with smart leaders and a well-designed product stuck in a market that just doesn’t have a lot of future potential.
Kevin Kelleher is a writer living in the San Francisco Bay Area. He has worked at Bloomberg, Wired News and The Industry Standard magazine and has written for Wired magazine, Reuters, Fortune, GigaOm, Popular Science, Salon, Portfolio as well as many others.