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Fitbit – Not in Shape for an IPO

Wearable technology is as hot as the late-90s dotcom boom.

Devices and apps that help you track fitness goals, monitor the quality of your sleep, and even help diagnose and treat diseases are proliferating in the marketplace. New innovations are announced almost daily.

With a bunch of New Year’s resolutions right around the corner, Fitbit – one of the would-be leaders in the market for fitness trackers – was a big holiday seller.

And Wall Street has been humming with news that Fitbit plans to do an initial public offering (IPO) this spring.

Don’t get swept up in the hype!

I’ve seen several signs indicating that the company just isn’t ready for primetime. And they all point to a major mistake most tech investors make all the time…

Christmas Day Blunders

A major Christmas Day blunder rendered thousands of Fitbits useless for those hoping to get fit and lose weight. This and other missteps are worrying signs that the company may not be ready to play in the big leagues.

Fitbit is an early innovator in designing and making these products. The company is doing a surprisingly good job competing against giants like Apple (AAPL), Google (GOOGL), and Samsung (SSNLF). At this time last year, Fitbit had an incredible 67% market share for wearable fitness trackers.

Unfortunately, the company first became famous for a major blunder, publishing some of its customers’ sexual habits in a way that they got picked up by Google’s search engine! But that was way back in 2011, and the error was quickly corrected.

And prior to last week, the company’s biggest black eye was a product recall.

In February 2014, the company recalled every single one of its Force fitness bands, over a million units, after consumers complained about mysterious rashes when wearing the product. Nickel in the stainless steel band and one of the adhesives used to hold the product together were identified as the cause of most of the rashes.

Another of the company’s popular products, the Flex, has the same issue, though it has not been recalled. Instead, the firm added a warning label informing customers of the potential allergens.

What’s important to realize here is that while the reaction to the adhesive was a new problem for Fitbit, sensitivity to nickel has been known among jewelry manufacturers and customers for over a hundred years!

Fast-forward to last week, though, and Fitbit had an even more embarrassing slip up…

On Christmas Day, perhaps the biggest day of the year for new accounts, the Fitbit website went down!

For most of the day across much of the country, people who had received a Fitbit as a gift and tried to register got a message claiming that the Fitbit site was down for “a little planned maintenance.” Their assurance that “We’re still counting your steps!” was of little comfort to frustrated customers. The Fitbit is useless if you can’t create an account and track your movements.

The website seems to be working now, but potential investors should definitely take this lapse seriously. It’s a timely reminder that you need more than a good product and a snazzy marketing campaign to be a successful technology company.

If Fitbit does decide to try to go public, you should be very careful about investing in the stock.

Can’t Build Without a Base

Investors should take a critical eye to Fitbit and ask why a company marketing bracelets didn’t know about nickel allergies…. Or how the company let its site go down on the busiest signup day of the year.

The response, “We’ve addressed the problems, and we can assure you they will not happen again,” shouldn’t be a good enough answer. To me, that just means that they haven’t anticipated the next problem.

What you should demand is some evidence that the company is putting systems in place to be a successful large company, not just a firm with impressive technology.

This lesson is a good one for investors interested in any new technology companies. Customer service, distribution, internal controls, and product testing are things that can take down even the hottest product if they are done poorly.

That’s where the minefields exist for companies and their investors.

To living and investing in the future,

Greg Miller

Greg Miller

, Senior Analyst

View More By Greg Miller