Disclosure: Zepp Health Corporation has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
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Price Performance (1-year)
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:
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
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
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.
We believe the company is exposed to the following key risks (not exhaustive):
We are maintaining our risk rating of 3 (Average)
