Things aren't going well for Fitbit (FIT) shares today following a downgrade from Stifel Nicolaus analyst Jim Duffy, who dropped his rating on Fitbit shares from hold to sell. The analyst's price target of $6 was unchanged, suggesting the move could be in response to shares rising over the past three months.

It's been a tough year for the fitness company, and the situation may only get worse in 2018, in Duffy's view.

Fitbit Ionic family on dark gravel

Image source: Fitbit.

No clear path to profit

In the research note (via Tech Trader Daily), Duffy argues that Fitbit has fallen behind in innovation. Despite some product introductions this year (most notably the new Ionic smartwatch), Fitbit has not been able to "unlock any meaningful healthcare business opportunities" or "inspire meaningful new consumer interest in the category."

On the consumer hardware side, Duffy expects Fitbit to remain unprofitable. If Fitbit is to have any hope of black ink, it will need to execute with growing Ionic sales since the wearables market is rapidly shifting away from basic devices (like the fitness trackers that represent the bulk of Fitbit's business) in favor of smart wearables that support third-party apps (like smartwatches).

Alternatively, Fitbit could cut costs "to align with the size of the business" to help profitability. That's a brutal situation that companies down on their luck sometimes find themselves in: Pressure to cut costs at a time when they need to be investing in research and development and innovation in order to bounce back.

Duffy does not believe either of these options looks promising as 2017 winds down. Meanwhile, the nascent digital health space has some interesting monetization possibilities, but nothing tangible has emerged despite Fitbit investing heavily in building its platform. Fitbit's efforts to capitalize on its digital health platform have "been underwhelming to date," according to Duffy.

Still just a hardware company

Fitbit has been trying for years to expand beyond consumer hardware sales, but has little to show for it. Fitbit acquired Fitstar in 2015 for about $25 million, hoping to build a subscription-based personal training service. The service was recently relaunched under a new name, Fitbit Coach, alongside the Ionic. The app-based personal training service costs $40 per year.

Over two years after the acquisition, Fitbit has yet to make any meaningful progress with growing the subscription service, which would generate high-margin, recurring revenue. "In each of the three and nine months ended September 30, 2017 and October 1, 2016, we derived less than 1% of our revenue from sales of our subscription-based premium services," Fitbit wrote in its most recent 10-Q. It's a bit early to know how the new Fitbit Coach will perform in the long run, but on the earnings call last month CEO James Park said the service is seeing a "large upswing in the number of subscribers."

Seeing as how hardware sales still comprise over 99% of revenue, Duffy believes it is appropriate to value Fitbit with consumer hardware valuation multiples, which are generally lower than those for companies that offer software and services.