Subscription-diet program Weight Watchers (NYSE:WTW) is slimming down itself -- but in stock price. Bouncing around its 52-week low, the company is experiencing some difficulty in finding growth as, you guessed it, technological innovation disrupts its age-old business model. Last week, the company saw more than a quarter of its market value vanish as analysts and investors questioned the long-term viability of the business, and now trades at less than six times its trailing earnings. Is the market right in assuming that Weight Watchers' appeal is thinning out, or do investors have a chance to get in on a severely beaten stock?

For the fourth quarter in a row (read: a year), Weight Watchers saw its sales figures drop. The former beacon of the weight-management world is failing to bring in new customers and keep its old ones at the meetings and buying product. Management brought out the usual claim of a "challenging retail environment." While it makes sense that people may opt out of paid weight-loss solutions during times of economic tepidity, this feels more like business disruption than a short-term blip.

The big problem here is that consumers have more information than ever at their disposal, and largely for free. Now, smartphone app stores are riddled with free products that offer individually tailored diet programs. The situation is analogous to Encyclopedia Britannica and Wikipedia -- it simply doesn't make sense to pay a relatively large amount for a product that is available for free elsewhere.

Weight Watchers' management isn't blind to the fact that the Internet is the new home of diet programs -- it has a formidable website but hasn't found a way to get consumers interested. Even in the most recent period, Web usage declined by nearly 7%.

All in all, Weight Watcher's fourth quarter saw an 11% dip in sales. Looking ahead, the company guided for a high end of $1.60 per share. Estimates had been above the $2-per-share range.

A turnaround
Will Weight Watchers have the opportunity to show a "then" and "now" snapshot where things improve dramatically? At this point, there isn't much evidence to suggest it.

The company's (and investors') best option may be to focus on slimming down costs as much as possible during the transition to an Internet-based business. This would mean shuttering the meetings and having as limited a brick-and-mortar presence as possible. This could give Weight Watchers' still appealing cash flow a chance to shine. In 2013, the company generated just over $320 million in operating cash flow. The market cap is only $1.2 billion. Foreseeably, cash flow will continue to drop, but the company could lessen its marketing spend and essentially let the remaining cash over the years flow to its owners. With that tactic, we'd likely see the company go private at some point.

Management hasn't mentioned the idea and is committed to a turnaround in 2014. With the current website numbers and earnings guidance, the strategy shouldn't excite investors even after the tremendous sell-off.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Weight Watchers International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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