That Fitbit Inc. (FIT) stock has been taking shareholders on a bumpy ride shouldn't really surprise anyone. For investors who buy tech stocks, price volatility is just a fact of life. Even Apple (AAPL -1.44%), which produced $50 billion of profit in the last year, has seen its share price swing by 50% over the past 52 weeks.

But Fitbit has been turning in an unusually weak performance -- even compared to its fellow small consumer technology upstarts. Though millions of people are still buying Fitbits, the wearable tech specialist has plummeted from a $9 billion market capitalization to less than $3 billion in the space of a year. It's down roughly 50% since its IPO last June.

Image source: Getty Images.

The bad news

Fitbit still dominates one of the hottest consumer tech categories around, and is shipping millions of new wearable devices to consumers each quarter. The problem is that it's losing its grip on the market. Sales rose by 50% in the first quarter, underperforming the 70% jump for industry. As a result, Fitbit's market share dove to 25% from 33% a year ago, according to research from IDC.

The competitive threat isn't coming just from Apple, which has soared from a standing start to an 8% share of wearables thanks to its smartwatch introduction. In fact, the bigger issue is the flood of low-cost rivals that, together, have fragmented the industry. All the top wearables vendors lost share in the past year, including Garmin (GRMN -0.09%), Xiaomi, and Samsung. As the market leader, Fitbit simply had the most to lose from this negative dynamic. 

More competition has also made the industry less profitable, as illustrated by Fitbit's plunging gross profit margin (it fell to 46% of sales last quarter from 50%). Rival Garmin suffered a similar decline, though less pronounced since wearables are a fraction of the business. Nevertheless, Garmin executives promised to keep pouring resources into competing in Fitbit's niche. "We believe these investments are strategically important in order to maximize the long-term opportunities in the fitness market," Garmin CEO Cliff Pemble said in a recent conference call.

That market share approach appears to be shared by nearly all competitors, who are slicing prices in hopes of gaining a foothold in this growing market.

Fitbit Inc.'s path forward 

Fitbit has several unique advantages in this fight, though. It owns the industry's most recognizable brand, which translates directly into strong customer loyalty. Nearly half of Fitbit Blaze and Alta owners upgraded from a prior Fitbit device. Its massive-installed base also creates a positive network effect. Users frequently share fitness and health tracking data with friends and family, which helps keep customers in the platform while attracting new ones. 

Images source: Fitbit.

Meanwhile, as the industry's biggest player -- and one that's laser-focused on wearables -- Fitbit has both the resources and the motivation to invest heavily in a long-term product pipeline. Its research and development headcount has rocketed to 755 software and hardware engineers from fewer than 300 a year ago. CEO James Park and his executive team are splurging on R&D "to accelerate the pace of innovation to deepen [Fitbit's] competitive moat," they told investors in early May.

The good news is that a few hit product launches could easily turn the tide for the business and return Fitbit to market-beating growth. Nearly half of last quarter's revenue, for example, came from just the Fitbit Blaze and Alta devices.

Investors who buy the stock now are betting that Fitbit's major profitability decline is just a down payment on stronger market share and more robust earnings to come. But more than anything else, Fitbit needs to set the bar for innovation in the industry if it's going to counter the trends that have turned wearables into a less attractive market lately.