Alphabet (GOOGL - Free Report) , owner of Google, announced last week that it would be acquiring wearable fitness company Fitbit (FIT - Free Report) , for roughly $2.1 billion. The move ramps up the competition in the wearables space as tech giants elbow for market share. Google’s Silicon Valley neighbor, Apple (AAPL - Free Report) , reported last week that its wearable sales have become a larger contributor to the tech titan’s overall business.
Fitbit shares rose over 15% in response to the news of the acquisition. As Google announces its arrival in the wearables space, investors may wonder whether it can compete with Apple’s growing wearables revenues.
Can Google Turn Around the Struggling Company?
Google will spend just a sliver of its $121 billion cash hoard to branch out in the hardware space with Fitbit’s products. Fitbit was founded in 2007 and has cratered since its 2015 IPO. The company has struggled to gain traction as Apple has dominated the smart watch market with its Apple Watch. Apple’s massive head start within the smart watch industry is a prominent obstacle Google will have to address.
Nonetheless, the Fitbit acquisition gives Google a bridge to the $3 trillion health care market. Google also provides the resources for Fitbit to expand and ultimately better compete in its highest capacity. Fitbit has sold about 100 million devices with around 28 million currently in use; its devices gather data on user’s health tendencies, which can be particularly valuable information for medical researchers and health insurers.
However, using Fitbit’s technology to collect sensitive data about user’s health was met with scrutiny, as Google is already under investigation for its competitive practices and advertising business. In anticipation of the potential backlash, Google said it wouldn’t use Fitbit data to help power its massive online advertising business. Rick Osterloh, who is the head of Google’s hardware division, stated “Similar to our other products, with wearables, we will be transparent about the data we collect and why.” Osterloh also said that Google would give users the choice to review, move, or delete their data.
Google is at heart an advertising company with over 80% of its revenue attributed to ads. Health data is a particularly sensitive entity that Google will have access to, which might spook off potential and current users. Salvaging its public image will be Google’s first task before it can focus on revamping Fitbit’s sales.
If the tech giant can figure out a way to regain the public’s trust, then transferring the data from the devices to medical professionals can make the deal worthwhile. Fitbit co-founder, James Park, stated “with Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone.” The two companies said that the deal is expected to be finalized sometime next year.
Google’s path to making the Fitbit acquisition worthwhile may be a long journey, but the buyout gives Google a presence in the lucrative health care market. There is a lot of good Google can do with the data collected on the Fitbit device, as it can provide valuable insights to medical professionals about broader health trends. It can also use the health data to help train artificial intelligence programs to better understand human health. Alphabet sits at a Zacks Rank #3 (Hold).
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