• Zepp expects Q4 revenue to rise 30%-60% QoQ ($55-$70M in Q4 vs $43M in Q3), driven by strong demand for the T-Rex 3, and its new Open Wearable Stereo (OWS) earbuds. The company stated that Q3 demand for the T-Rex 3 exceeded expectations, creating production bottlenecks, and supply constraints. These constraints have since been resolved to meet management's projected demand for Q4. 
  • In Q3, Zepp slipped by one spot to seventh in global smartwatch unit sales, trailing Apple (NASDAQ: AAPL), Samsung (KOSE: A005930), Garmin (NYSE: GRMN), Fitbit (Google/NASDAQ: GOOGL), Xiaomi (SEHK: 1810), and Huawei. For comparison, Apple sells 35-40M units annually, while Zepp sells 4-5M units.
  • Larger players like Apple are losing market share to lower-priced competitors, such as Zepp. Apple reported a 3% YoY decline in revenue from wearable unit sales in the quarter ended September 2024. For the full fiscal year, revenue was down 7% YoY. That said, global smartwatch shipments are expected to rise by 5%-10% in 2024, driven by growing health awareness, AI integration, advancements in sensors and connectivity, and the rising popularity of wearables.
  • At the end of Q3, working capital, and investments, net of long-term debt, totalled $249M vs Zepp’s MCAP of $40M, implying that the shares are trading well below liquid assets. 
  • Despite favorable management guidance for Q4, we are lowering our 2024 revenue and EPS forecasts due to weaker-than-expected Q3 results. Our forecasts are more conservative than management's guidance. We expect EBITDA to turn positive in H2-2025, while management estimates it will occur in early 2025.

Price Performance (1-year)

 

  YTD 12M
ZEPP -53% -50%
NYSE 17% 24%

 

Unit Sales & Other Key Metrics

Source: FRC / Company

In Q3-2024, shipments were down 75% YoY, to 0.7M units (H1: down 66% YoY), 22% lower than our estimate. As a result, revenue fell 49% YoY, missing our estimate by 11

 

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 – China accounts for 70% of sales in this segment. In addition to its own portfolio of products, Zepp manufactures wearables for Xiaomi, the second largest wearables technology company, behind Apple. Xiaomi owns 20% of Zepp’s outstanding shares. Zepp's dependence on Xiaomi has been waning, as evidenced by the declining share of total revenue contributed by Xiaomi.

 

Self-branded unit shipments fell 55% YoY (H1: down 48%), amid Zepp halting production of several low-margin products. This strategic move paid off as the average product price was up 104% YoY to $61, resulting in significantly higher gross margins  

 

Gross margins were up 7 pp to 41%, approaching Apple's 45%. Zepp spent 24% of revenue on sales/marketing expenses, while Apple typically spends <5%

Operating expenses were up 12% YoY, and 15% QoQ, exceeding our estimate by 11%; the company attributed this to the front-loading of certain marketing expenses. As a result, EBITDA deteriorated YoY and QoQ; net loss was up 22% QoQ

Working capital, and investments, net of long-term debt was $249M vs the current MCAP of just $40M, implying that ZEPP is trading well below liquid assets 

 

FRC Projections and Valuation 

Zepp’s products accounted for 2.8% of global smartwatch shipments in 2023. It is estimated that global smartwatch shipments will increase 5-10% p.a. in 2024. Historically, Zepp's revenue growth rate has averaged 1.6x the global growth 

Due to Q3 falling short of expectations, we are reducing our revenue and EPS forecasts. As a result, our DCF valuation decreased from $13.92 to $12.80/share

 

Comparables Valuation

ZEPP remains the most undervalued stock on our list of comparables. Given the company’s negative enterprise value, its shares are trading at -0.1x forward revenue vs the sector average of 2.32x 

Applying 2.32x to our 2024 revenue forecast for Zepp, we arrived at a comparables valuation of $16.50/share (previously $19.48/share)

We are reiterating our BUY rating, and adjusting our fair value estimate from $16.68 to $14.65/share (the average of our DCF and comparables valuations). We continue to view Zepp as an attractive acquisition target for larger players such as Xiaomi, which is already a significant investor. Our Q4 revenue forecast is at the lower end of management's guidance, but management is optimistic that Q4 will deliver significant growth, with expectations to break even by early 2025. We believe the market will react positively, even if just one of the two scenarios plays out. 

 

Risks

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

  • Competition and innovation
  • Supply chain vulnerabilities
  • Reliance on third-party manufacturers
  • Officers, directors, and principal shareholders hold 95% of total voting power
  • Need to always allocate substantial budgets for marketing

 

We are maintaining our risk rating of 3 (Average)

 

Appendix