Shares of Fitbit (FIT) have lost 85% of their value since peaking in 2015. Despite soaring costs thanks to major investments in research and development (R&D) and marketing, Fitbit's growth is at risk of grinding to a halt. The company expects the fourth quarter to produce year-over-year revenue growth of just 2% to 5%, even with a slate of new products available.

We won't know for sure how Fitbit did this holiday season until the company reports its fourth-quarter results. There has been some mixed data points that paint an unclear picture. An analyst at Pacific Crest found that inventory levels at retailers were elevated prior to Christmas, with the Blaze and Alta doing well, but the updated Charge 2 and Flex 2 faring poorly. In contrast, the Fitbit App jumped to the No. 1 spot on the iPhone app store list of free downloads in late December, suggesting that Fitbit devices were a popular gift.

Image source: Fitbit.

It's hard to draw any concrete conclusions from this limited data (although that certainly hasn't stopped the stock market from reacting). Ultimately, Fitbit's success this holiday season boils down to one thing.

The refresh cycle

Fitbit's original Charge fitness band was launched in late 2014, with a version that featured a heart rate monitor, Charge HR, becoming available in January of 2015. The Charge was a wildly successful product, with the Charge HR becoming the company's most popular product. The Charge HR tracks steps, distance, calories burned, floors climbed, sleep, and heart rate, syncing the data seamlessly with the Fitbit smartphone app. These core features compelled millions of consumers to strap a Fitbit device onto their wrists.

The Charge 2, launched in September of last year, replaced the Charge HR. It brought with it a larger, higher-quality screen, as well as a handful of other features. Connected GPS -- a feature allowing the Charge 2 to support GPS tracking if a smartphone is on hand -- is a new addition, as is a mode that leads the user through a short breathing exercise. The design was also revamped, with interchangeable bands now supported.

But while the Charge 2 is certainly an upgrade, the core functionality is still largely the same. Fitbit has yet to prove that it can convince existing customers to upgrade in significant numbers. The fitness tracker market is still a new market, and Fitbit is still a young company. Its growth thus far has largely been due to selling devices to new customers. During the third quarter, 60% of device activations were from new customers.

The company's weak guidance for the fourth quarter suggests that this steady stream of new customers that the company has enjoyed in the past few years is starting to run dry. Fitbit's holiday sales, then, depend heavily on how many owners of the original Charge and Charge HR decide that the Charge 2 is worth spending another $150.

Unlike the early days of the smartphone market, where two years was an eternity and flagship devices were rendered obsolete fairly quickly, the fitness tracker market seems more mature. The Charge 2 is a modest upgrade, even though it launched nearly two years after the original. Without a whiz-bang new feature to compel Charge HR owners to upgrade, many won't. That's the fundamental problem holding back Fitbit's sales.

Fitbit could surprise us all and report fourth-quarter results far better than its own expectations. But the analyst report on channel inventory suggests that the Charge 2 is not spurring upgrades in the way Fitbit had hoped. The wearables market isn't growing very fast, posting just 3.1% growth in the third quarter. If that trend persists, Fitbit will need its existing customer base to upgrade in droves in order to post growth. Whether that happened this holiday season will become clear when Fitbit reports its fourth-quarter results.