This article was updated on May 12, 2017, and originally published on Dec. 30, 2016.

Fitbit (NYSE:FIT) shares are down sharply so far in 2017 as investor hopes faded that its activity-tracking devices would find strong demand following a rough holiday quarter outing.

After a brutal 75% decline for the stock in 2016, any evidence that hints at a brighter picture for Fitbit device sales could send shares spiking. However, that's no reason to rush out and buy the stock in hopes of benefiting from a big demand uptick.

Hit products on the way

For one, its products simply aren't finding traction in the market right now. In early May, Fitbit announced that it sold just 3 million devices, compared to 4.8 million in the year ago quarter.

A Fitbit smartwatch.

Image source: Fitbit.

Sure, its sales trends are better than they appear at first blush since retailers are still working down their elevated inventory levels from the holiday quarter. However, it's worth remembering that management hoped this current crop of devices would ignite demand and build momentum for the company's turnaround. And yet, revenue and profitability are both way down in the past year. 

Even if Fitbit manages surprisingly strong sales volumes ahead of the 2017 holiday season, the gains could come at the expense of falling average selling prices and perhaps a further decline in gross profit margin. In other words, shares could suffer even if the company beats its own bleak guidance targeting revenue of between $1.5 billion and $1.7 billion this year.

Buyout bailout

Fitbit's stock pops higher from time to time in response to rumors that it will be acquired. The idea is appealing -- after all, the company is the market share leader in the high-growth wearable tech industry. It would make an easy acquisition for many tech companies, too, especially given that it recently drifted below $1.5 billion in market capitalization from almost $7 billion at the start of 2016.

A jogger checks her fitness device.

Image source: Getty Images.

It's never a good idea to make a potential buyout your core investing thesis, though. Acquisition rumors come and go, and in some cases are completely fabricated. Operating trends are far more important to long-term shareholder returns. And right now, those trends suggest Fitbit has a dominant hold on its industry, but is also likely to see intense pressure on its earnings power over the short term as sales growth decelerates and it ramps up product development spending.

It's on sale

Shares are down more than 60% over the last year, meaning investors can grab this stock for less than $6 per share even though it was pushing $30 as recently as January 2016. The same trend holds for its price-to-sales ratio, which passed 1.5 times at a few points over the last 12 months but is now stuck around an all-time low of 0.65.

FIT PS Ratio (TTM) Chart

FIT PS Ratio (TTM) data by YCharts

Yet investors purchasing shares a year ago were buying a business that was growing at a 50% pace and enjoying expanding profitability in a surging industry. Today, Fitbit is forecasting sales declines as its gross profit margin dives to 43% from 48%. Not only has the market matured into slower overall growth, but rivals at every price point are stepping up their games. For example Garmin (NASDAQ:GRMN) poured resources into product development over the past year and it just recently boosted its advertising spending plans to support its newest crop of wearables. These moves have sparked a nice rebound in Garmin's sales growth. Its fitness device segment grew 24% in 2016 as gross margin improved to 53% of sales. Also, Chinese competitor Xiaomi has started scooping up market share at lower price points with its cheap entry-level wearables products.

Fitbit is aiming for a similar recovery by plowing cash into research and development and marketing. Until there's real evidence of that rebound, though, the stock isn't likely to claw back a significant portion of its losses.

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.