Smart wearables maker cuts fourth-quarter revenue guidance, but expects to stay profitable, as competition intensifies

Key takeaways:

  • Zepp Health has cut its fourth-quarter revenue guidance, sending its shares to near all-time lows, as its shipments fall due to overreliance on Xiaomi relationship
  • Global chip shortage and fresh Covid restrictions are also weighing on company as it tries to gain share in the crowded global smartwatch space

By Mia Shanley

Smart wearable device maker Zepp Health’s (ZEPP.US) efforts to carve out a niche in the crowded global smartwatch space are being hampered by the global chip shortage and fresh Covid restrictions, just as competition is also heating up. That’s the key message coming in a business update from the company, whose more budget-friendly products compete with pricier offerings from tech giants Apple (APPL.US), Google-owned Fitbit and Garmin (GRMN.US).

That update, issued on the last day of 2021, saw Zepp cut its fourth-quarter revenue forecast to between 1.6 billion yuan ($252 million) and 1.75 billion yuan, even as it tried to calm investor nerves by saying it expected to remain profitable. The new forecast was down from previous guidance of 1.75 billion yuan to 2.0 billion yuan provided Nov. 16.

Zepp blamed the downward revision on “greater than anticipated effects of Covid, including a more persistent worldwide chip shortage and newly increased Covid restrictions and lockdowns in key European markets.”

The news initially sparked a selloff that saw Zepp’s American depositary shares (ADSs) fall as much as 4% on the last trading day of 2021. But the stock eventually bounced back to finish the day flat, suggesting investors were aware of the weak performance. The shares have continued to edge down in the last few trading days, and are now down about 4% from pre-announcement levels.

Zepp’s shares now trade at $4.85 – a fraction of the $20.25 peak they reached in February last year – as investors search for clearer signs of where it stands in the global smartwatch space. The stock may also be a victim of a broader selloff for Chinese shares over the last year over regulatory concerns, even though it appears to face relatively low risk in that regard.

The company, whose mainstay is relatively simple wristbands, could be falling victim to the latest industry trends as well.

“Demand has been slowly shifting away from wristbands towards watches as consumers increasingly want a more capable device and as the gap in pricing narrows,” Jitesh Ubrani, research manager for market research firm IDC, said in a December report. “The number of watches sold for under $100 is now equal to wristbands, which have dominated this price band in the past. Growth amongst Indian and Chinese brands has been leading the low-end watch space while Apple, Huawei, and Samsung maintain a hold at the high-end.”

Zepp previously reported its third quarter units shipped fell almost 40% year-on-year to 9.9 million due to its reliance on more basic fitness-focused wristbands. It posted a sharp decline in unit shipments of wearable products for smartphone maker Xiaomi (1810.HK), a key partner that is also a major Zepp investor.

Zepp has been trying to wean itself off of Xiaomi by launching its own Amazfit and Zepp branded products. Shipments for its own brands rose almost 90% in the third quarter, though that rate was slower than the 114% gain for the second quarter.

Zepp stands to win big if it can secure a chunk of the global smartwatch market, which Mordor Intelligence has forecast will register compound annual growth of almost 22% through 2026. Its sleek-looking smartwatches have so far garnered fairly upbeat reviews.

Epic’ battery life

One reviewer for Tom’s Guide called Amazfit’s battery life “epic” and said the watches are “capable alternatives” to better known wearable brands, particularly for consumers on tight budgets. Another reviewer for ZDNet said Amazfit’s GTR 3 was an affordable smartwatch punching higher than its price.

On its U.S. website, Amazfit smartwatches ranged from $189.99 for a GTR 3 PRO to as low as $59.99 for a Bip U Pro.

The company is getting kudos on the fashion front as well. Its GTR 3 PRO got mentioned in the British edition of GQ Magazine, which called it a “stylish timepiece you’ll happily wear on your wrist.”

Zepp, which listed on the New York Stock Exchange in 2018 and also sells other “smart” products such as earbuds, scales and home fitness equipment, said last month that global shipments of its independent brands beat the industry’s growth rate and that it had the sharpest increase in global sales among the top five market leaders.

Progress has been good in markets like Brazil, Russia, the Czech Republic and Indonesia, where Zepp says it is ranked first in terms of shipments. It also holds 20% market shares in Italy, Thailand and Spain.

But its budget-friendly products carry low margins in general. Margins are also generally lower for its “Mi” branded products that it makes for Xiaomi when compared with its own-brand business that it’s trying to build up. Xiaomi-related products accounted for a sizable majority 67% of Zepp’s revenue last year, though that was down from an even larger 72% in 2019, according to the company’s latest annual report.

Its gross margin in last year’s third quarter was 20.2%, down from 22% in the second quarter.

Until there’s greater clarity on the company’s potential in the global smartwatch space, Zepp’s shares may continue to stay mired in single-digit territory. The stock reached an all-time low of $4.26 in December.

With a market value of just $300 million, Zepp trades at a hefty discount to peers. Its current price-to-earnings (P/E) ratio stands at about 10, or less than half of Garmin’s 23.

Zepp shares have lost more than half their value in the past six months, in part due to the previously mentioned tightening regulation in its home China market. That’s a far steeper decline than Hong Kong’s Hang Seng Index, which is down about 18% in the same period. And it contrasts sharply with the tech-heavy Nasdaq Composite’s roughly 11% gain over the same period.

Like many U.S.-listed Chinese companies in a similar situation, Zepp clearly thinks its shares are undervalued. It was quick to point out in its announcement last week that it has purchased $3.6 million worth of stock since unveiling a $20 million share buyback program in November when its shares were trading at over $8.

Founded in 2013, Zepp was until last year known by the more Chinese-sounding Huami name. Despite its continued heavy reliance on China, it has been trying to reposition itself as an international player with a bigger presence in Silicon Valley.

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