Fitbit (NYSE:FIT) shares fell 3% on Nov. 1 after the wearables maker reported its third quarter earnings. Its revenue fell 22% annually to $393 million, marking its fourth straight quarter of double-digit sales declines, and it posted a non-GAAP net loss of $0.01 per share, versus a profit of $0.19 per share a year ago. However, those headline numbers beat analyst expectations for $392 million in revenues and a loss of $0.04 per share.

For the fourth quarter, Fitbit forecasts -1% to 5% sales growth, and for its non-GAAP earnings to come in between a loss of $0.03 and a profit of $0.01. For the full year, Fitbit expects a 24%-26% sales decline, and a net loss between $0.23-$0.27 per share compared to a loss of $0.12 per share in 2016.

A woman wears a Fitbit Charge 2.

A woman wears a Fitbit Charge 2. Image source: Fitbit.

Those estimates all either matched or beat analyst expectations, but investors clearly weren't impressed with Fitbit's overall performance. As a result, the stock remains down about 15% for the year, and more than 50% over the past 12 months -- making 2017 a year to forget for the struggling wearables maker. Let's take a look at why Fitbit fell off a cliff, and whether or not it could ever rebound.

What happened to Fitbit?

Fitbit's fitness trackers made it one of the hottest brands on Wall Street when it launched its IPO over two years ago. Sales were up 255% in 2013, 175% in 2014, and 149% in 2015. Analysts gushed over the rosy future of wearable devices, and the stock surged from its IPO price of $20 to nearly $30 on its first day of trading.

Today, the stock is worth about $6. Three big problems torpedoed Fitbit's high-flying stock. First, other companies like Xiaomi and Garmin commoditized the fitness tracker market with cheaper devices. Second, companies like Samsung and Apple (NASDAQ:AAPL) launched pricier smartwatches with built-in fitness tracking capabilities.

Fitbit, once the largest wearables maker in the world by market share, slipped to third place behind Xiaomi and Apple, according to IDC's second quarter numbers. Between the second quarters of 2016 and 2017, Fitbit's market share plunged from 24.1% to 12.9%.

Lastly, wearables remained a niche market that didn't come anywhere close to matching smartphones or tablets as a new product category. As a result, Fitbit's revenue rose just 17% last year, and is now headed for its first annual decline this year. To lift sales, Fitbit cut prices and invested more in the development and marketing of new products. That caused its margins to contract and resulted in four straight quarters without a profit.

FIT Operating Margin (TTM) Chart

Source: YCharts.

What's Fitbit's turnaround plan?

Things look bleak for Fitbit, but the company still has other irons in the fire. The first big effort is Ionic, its first full-featured smartwatch. The Ionic faces fierce competition from the Apple Watch 3, but the Ionic's lengthy battery life of about four days crushes the Apple Watch's single-day battery life, and it's slightly cheaper at $300.

During last quarter's conference call, Fitbit CEO James Park claimed that the Ionic and the older "smartwatch-like" Blaze were respectively the first and second best-selling smartwatches on Amazon in the US.

The Ionic is also intended to become the foundation of a new ecosystem for Fitbit. The device supports its new mobile payments platform Fitbit Pay. It also recently partnered with medical device maker Dexcom (NASDAQ:DXCM) to sync its glucose monitoring devices to the Ionic's display, which could encourage other medical device makers to share their data with Fitbit.

Fitbit's Ionic smartwatches.

Fitbit's Ionic smartwatches. Image source: Fitbit.

Fitbit is also expanding its app ecosystem. It already reaches millions of users with its flagship app, but it's also developing a full app store for the Ionic, which could lock in users and become a new stream of revenue for the company. It also purchased smartwatch maker Pebble's assets and high-end smartwatch maker Vector to expand its hardware and software capabilities.

Fitbit is also diversifying away from standard wearable devices with new products like the Fitbit Flyer wireless headphones and the Aria 2 smart scale, but revenue from those products should remain low compared to best-selling wearable products like the Charge 2.

But will these efforts pay off?

Fitbit faces a tough uphill battle, and it's unclear when its sales and earnings will start growing again. But for now, the stock looks fairly cheap at 0.8 times sales, and about 20% of shares were still being shorted as of Oct. 24. This means that expectations are currently so low that any good news could cause this beaten-down stock to jump.

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.