Already the king of wearables, Fitbit (NYSE: FIT) is betting it can also be the king of smartwatches. On Wednesday, the company announced it had acquired “specific assets of Pebble, including key personnel and intellectual property related to software and firmware development.” Hardware isn’t part of the deal, which, according to reporting by Bloomberg, totaled less than $40 million. Fitbit ended the third quarter with $672.1 million in cash and short-term investments, and no debt.
“With basic wearables getting smarter and smartwatches adding health and fitness capabilities, we see an opportunity to build on our strengths and extend our leadership position in the wearables category,” “With this acquisition, we’re well positioned to accelerate the expansion of our platform and ecosystem to make Fitbit a vital part of daily life for a wider set of consumers, as well as build the tools healthcare providers, insurers and employers need to more meaningfully integrate wearable technology into preventative and chronic care,” said James Park, CEO and co-founder of Fitbit, in the press release announcing the deal.
How Park intends his company to use Pebble’s underlying intellectual property to get there isn’t entirely clear, though the press release makes special mention of how Pebble had developed cross-platform compatibility with both Android and iOS smartphones in order to display messages from connected devices. Adding that secret sauce to Fitbit’s Blaze line of smartwatches and other devices would make sense in the short term.
Longer term, Fitbit leads a wearables category that isn’t growing nearly as fast as analysts might have expected. According to the latest data from IDC, the overall wearables market grew by just 3.1% year over year in the third quarter. Fitbit, for its part, saw its shipments increase 11% over the same period. Adding Pebble could help accelerate growth in new ways.
In the meantime, it’s worth noting that Fitbit trades for 0.48 times enterprise value when compared to total revenue. The metric is instructive in that it measures the cash price investors are willing to pay for every $1 of operating revenue. Or, 48 cents in this case. Last June they were paying $8, and yet revenue and cash flow have improved steadily in the quarters since. Ether Fitbit is mired in a tailspin of unrecoverable losses that will culminate with its bankruptcy, or this stock is one of the market’s great bargains right now. Give its market leadership, balance sheet, and expanding portfolio, the latter scenario strikes me as more likely.
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