Source: Fitbit

Fitbit (NYSE:FIT) is the world's leading tech wearables company and continues to grow at a rapid pace. Despite their industry standing, the company's stock price has sharply declined over the last year, down over 50% from its 52-week high of $45.25, due to concerns over growing competition and its future growth and profitability. I think the market's concerns over Fitbit's future are overblown and, with the stock close to its all-time lows, I recently bought it at what I thought was an attractive price with plans to hold for several years.

The Market Share Leader
Competition in the wearables space has heated up over the last several years with the arrival of the Apple (NASDAQ:AAPL) Watch, Xiaomi's Mi Band and many fitness tracking devices launched by smaller companies. Even with growing competition, Fitbit remained the dominant player with 24.5% of market share in the first quarter of 2016 . The closest competitors were Xiaomi, with 19% market share, and Apple, with 7.5% market share. It's important to note there are vast differences between the product mix offered by each of these companies.

Source: IDC Worldwide Quarterly Wearables Tracker

Apple offers two products, the Watch, prices range from $549 to $1099, and the recently launched Watch Sport, prices range from $299 to $349 . Xiaomi's only fitness tracking device is the Mi Band, which is priced at $14.99 , and offers limited features compared to Fitbit and Apple.

Fitbit differentiates its product assortment from Apple and Xiaomi in several key ways, which should help it retain its market share. First, it currently offer 8 products, ranging from simple tracking devices to smartwatches. Fitbit's newer products provide continuous heart-rate monitoring, on-screen workouts, connected GPS, automatic sleep tracking, and more. It's newest product, Blaze, provides similar functionality to the Apple Watch, but costs $100 less and has a battery that lasts five days versus Apple Watch's 18 hours of life.  Second, its products' prices range from $59.95 to $249.95, occupying a price niche between its two closest competitors. Finally, Fitbit is accessible on 200+ phones, including Android, iOS and Windows operating systems – more than any other fitness tracker on the market.  

Plenty of Room to Grow
There have been growing concerns that the market for fitness bands and tracking devices is reaching saturation, but there's evidence that the category (and the value of Fitbit's share of it) has plenty of room to grow. According to IDC, a global provider of market intelligence, worldwide shipments of wearables are expected to reach 101.9 million units by the end of 2016 and continue growing at a compound annual growth rate of 20.3% over the next 4 years. IDC expects 213.6 million units in the wearables category to be shipped in 2020. This estimate includes clothing and eyewear, but watches and wristbands should still be major categories with an expected 80% share of the wearables units shipped in 2020.  Fitbit proved it can continue to create popular products with the success of the recently launched Blaze and Alta, which accounted for 54% of the company's revenue in the second quarter of 2016. I think Fitbit could remain the market share leader over the next several years as they continue launching new devices, which should allow them to maintain their share, or even capture more of the quickly growing wearables market.

Building A Social Experience
Fitbit's competitive advantage isn't limited to product features -- the company's apps and social experience create a powerful network effect. According to Fitbit CEO James Park:

The robust social experience in the Fitbit app is another key part of our success, and it's created a competitive mode supported by the network effect of our large active user community. We believe people are more likely to buy a Fitbit over a competitor, because their friends and family are more likely to be already participating in the Fitbit social experience. 

By year-end 2015, active users in the app increased 152% year over year, with 16.9 million active users out of 29 million registered device users. The company also added 1,000 Fitbit Wellness enterprise customers, who traditionally have purchased large quantities of devices or subsidized employee purchases through discounts and encouraged active use.  

Attractive Valuation
The price-to-sales ratio, or P/S ratio, is a valuation measure calculated by dividing a company's market cap by its revenue. It could be an indicator a company is undervalued when compared to company's in a similar industry. Forward price-to-earnings, or forward P/E, is another valuation measure calculated by dividing the stock price by analyst estimates of future earnings per share. In the most recent quarter, Fitbit had a P/S ratio of 1.51 and forward P/E of 13.24, compared to 2.85 and 18.65 for the S&P Information Technology Index.

Potential Acquisition Target
That attractive valuation, plus the fact that the company has no long-term debt, is experiencing rapid revenue growth (46.5% YOY in last quarter), and has plenty of cash ($535 million), means Fitbit could become an acquisition target. In the past, Apple, Garmin, Samsung, and Under Armour had been mentioned as potential acquirers. Fitbit has significantly increased R&D and SG&A expenses over the last several years and an acquirer could realize substantial cost savings by cutting from these areas, making the acquisition more attractive. I didn't invest expecting an acquisition, but I'm not ruling out the possibility.

As I stated earlier, I think a lot of the market's concerns over Fitbit's future growth are overblown. Fitness tracking devices and wearables will continue to be an extremely competitive market, but I think Fitbit is positioned to continue leading the category.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.