As Fitbit Inc Rebuilds, Competition Will Only Get Tougher

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Fitbit (NYSE: FIT) has seen decelerating growth in seven of its last eight quarters , and investors have punished the stock. Shares of the fitness device maker are down over 80% from their first day close back in 2015.

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While Fitbit CEO James Park has declared 2017 a "rebuilding year", the challenges Fitbit faces are only intensifying. The company is losing market share to fast-growing rivals, while its upcoming smartwatch will enter a space that's more crowded than ever. And device-agnostic software solutions are intruding on Fitbit's path into enterprise health.

No longer No.1

For the last few years, Fitbit sold more wearable devices than any other company, but in the first quarter of 2017, Fitbit lost that title. According to IDC, the wearables market grew 17.9% during the quarter, but Fitbit device sales fell 37.7%, moving the company to third place behind Xiaomi and Apple.

Management has projected full-year revenue declines of 22% to 31%. As smartwatches become a more important part of the wearables market, Fitbit does not have a strong offering to win over consumers.

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Where is its smartwatch?

During the fourth-quarter earnings call, Fitbit management admitted that the fitness tracker market in the U.S. is "saturated", which leaves investors wondering, "What next?" The company's answer to that question is the long-awaited Fitbit-branded smartwatch, though it is rumored to have encountered development issues and still lacks an official release date.

My concern with these delays goes back to advice from my dad, who told me never to buy version 1.0 of anything. He believed that regardless of all of the testing and development work, there will always be issues in the first generation of any product. The longer Fitbit takes to release its first smartwatch, the more advanced its competitors will become. Apple CEO Tim Cook underscored the engineering challenges of smartwatch development in the latest earnings call, "[T]he watch area is really hard. It, in essence, from an engineering point of view, is similar to a phone in terms of the intricacies and so forth."

With Apple on the second version of its smartwatch, plus a well-established app store, it's hard for me to believe that Fitbit can release something competitive in a side-by-side comparison. And there are plenty of other companies making inroads in the smartwatch and wearables markets.

Fitness tracking ... on any device

In March, Fitbit announced a focus on "enterprise health" that "will expand on the company's early successes in working with insurance companies, employers, health systems and other healthcare partners."

An enterprise health focus is a good way for Fitbit to grow its reach and build on its strengths. However, competitors are targeting this opportunity as well -- companies such as Virgin Pulse, a subsidiary of Virgin Group, and Noom are providing corporate wellness software solutions that are device agnostic. Fitbit has long touted its large active user community as a reason for customers to choose Fitbit over competing products, but these software solutions give users the same benefits with potentially any device. Continued growth of device-agnostic software solutions for corporate wellness will prove to be yet another obstacle to Fitbit's growth in this area.

Where does that leave Fitbit?

Despite these challenges, not everyone believes Fitbit is out for the count. In the most recent IDC report, research manager Ramon Llamas indicated that Fitbit shouldn't be dismissed when it comes to breaking into new segments and markets:

However, by no means should Fitbit be removed from the wearables conversation ... With a user base of 50 million, a strong presence within corporate wellness, and assets that keep it top of mind for digital health, Fitbit is well-positioned to move into new segments and markets.

Park has a clear view of his company's priorities as well. First, execute on the turnaround plan, while at the same time developing new sources of revenue for the company. In the last earnings call he summarized Fitbit's overall status: 

We have much work ahead of us. Execution on the rollout of our smartwatch product line is moving forward, and our overall business is going as planned ... And while still early in the process of diversifying our revenue streams, we remain excited about our vision and roadmap.

While it sounds like Fitbit has a plan in place, executing on that plan is going to be far from easy.

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Brian Withers owns shares of Fitbit. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has a disclosure policy.