Navigating Tariffs & Capitalizing on Affordability

Report Highlights

• Global smartwatch shipments declined 7% YoY in 2024, mainly due to fewer product upgrades. While Apple’s shipments dropped 19%, other key players experienced robust growth. Consensus estimates forecast 2% growth in 2025, fueled by more upgrades, rising health awareness, AI integration, and increased wearables popularity.
• Zepp’s Q4 revenue growth was primarily driven by the launch of the T-Rex 3, its latest addition to the rugged and affordable GPS smartwatch category. In Q1-2025, Zepp launched the Amazfit Active 2, targeting fashion-conscious, health-oriented consumers. The product has garnered positive reviews as an affordable alternative to premium brands like Apple, Samsung, and Garmin. Zepp plans to release one product per quarter this year, compared to just one last year. 
• The company is ramping up its marketing efforts, signaling management's focus on driving revenue growth this year. In February 2025, Zepp signed Olympic medalist Gabby Thomas, and World No. 4 tennis player Jasmine Paolini, as brand ambassadors.
• The new tariffs implemented by Trump on Chinese imports, including smartwatches, will have minimal impact on Zepp, as most of its U.S. exports are produced in South Asian countries outside China. With North America accounting for 25% of its shipments, Zepp is likely to benefit as higher tariffs may drive demand for affordable alternatives. Conversely, Apple's reliance on Chinese manufacturing will likely expose it to greater adverse effects.
• At the end of Q4, working capital, and investments, net of long-term debt, totalled $207M vs Zepp’s MCAP of $51M, implying that the shares are trading well below liquid assets.

Price Performance (1-year)

Unit Sales & Other Key Metrics

Source: FRC / Company

Q4 shipments were up 29% QoQ, but down 57% YoY. Full-year shipments were down 67% to 4M units, 5% lower than our estimate, amid Zepp halting production of several low-margin products 

In line with industry standards, Zepp retains 70% of the retail price of its products as revenue, while retailers and distributors keep the remaining 30%.

Zepp does not disclose segmented results:

• Smart wristbands, and watches, constitute 90%+ of revenue. 
• Self-Branded Products - Europe & the Middle East account for 50% of sales, followed by North America (25%), China (10%), and the rest of the world (15%) 
• Xiaomi (SEHK: 1810) Products – In addition to self-branded products, Zepp manufactures wearables for Xiaomi. Zepp's dependence on Xiaomi has been waning, as evidenced by the declining share of total revenue contributed by Xiaomi. Xiaomi owns 20% of Zepp’s outstanding shares. China accounts for 70% of sales in this segment.

Although 2024 revenue fell 48% YoY, it surpassed our estimate by 3%, due to higher-than-expected product prices. The average product price was up 20% YoY to $75, resulting in significantly higher gross margins  

Gross margins were up 13 pp to 39%, vs our forecast of 40%, approaching Apple's 45%. Zepp spent 25% of revenue on sales/marketing expenses, while Apple typically spends <5%

Operating expenses were down 4% YoY, but came in 6% higher than our estimate, primarily due to increased marketing expenses. As a result of lower revenue, adjusted EPS declined from   -$0.15 to -$0.20 vs our forecast of -$0.19

Working capital, and investments, net of long-term debt was $207M vs the current MCAP of just $51M, implying that ZEPP is trading well below liquid assets 

Subsequent to year-end, Zepp refinanced its debt maturing in 2025 into long-term debt, at a lower interest rate, improving working capital, and reducing interest expenses for 2025.

FRC Projections and Valuation 

According to Fortune Business Insights, the global smartwatch market should grow from $29B in 2023, to $34B in 2024, reaching $104B by 2032, reflecting a CAGR of 15%.

Zepp’s products accounted for 2.8% of global smartwatch shipments in 2024. It is estimated that global smartwatch shipments will increase 2% in 2025 

Historically, Zepp's revenue growth rate has averaged 1.4x the global growth rate. We are raising our 2025 OPEX forecast, as 2024 expenses exceeded expectations

As a result, our DCF valuation decreased from $12.80 to $11.50/share

Comparables Valuation

ZEPP remains the most undervalued stock on our list of comparables, trading at 0.02x forward revenue vs the sector average of 2.27x (previously 2.32x). Applying 2.27x to our 2025 revenue forecast for Zepp, we arrived at a comparables valuation of $16.22/share (previously $16.50/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $14.65 to $13.87/share (the average of our DCF and comparables valuations). We believe the company’s diversified manufacturing footprint positions it favorably against competitors facing higher tariff impacts. With upcoming product launches, industry growth driven by health awareness and AI integration, and its relative undervaluation, we believe ZEPP stands out as an attractive under-the-radar opportunity.

Risks

We are maintaining our risk rating of 3 (Average)

We believe the company is exposed to the following key risks (not exhaustive):

• Competition and innovation
• Supply chain 
• Reliance on third-party manufacturers
• Officers, directors, and principal shareholders hold 95% of total voting power
• Operates in a marketing intensive industry

Appendix