Shares of Fitbit (FIT) kicked off last week by hitting their highest levels since January, but an analyst downgrade a day later was all it took to send the wearable-tech pioneer sharply lower. Fitbit stock tumbled 9.6% last week, after Jim Duffy at Stifel downgraded the stock from "hold" to "sell."

Duffy thinks hopes for a turnaround at Fitbit next year are too optimistic. He sees the top dog in fitness-tracking bracelets continuing to post losses and burn through cash in 2018. Fitbit's revenue would need to bounce back and grow at a clip in the mid-teens next for Fitbit to hit breakeven on its operating margin, and that's a high hurdle for a company coming off four straight quarters of double-digit percentage declines in revenue. 

Julianne Hough jumping rope with a Fitbit bracelet on.

Image source: Fitbit.

Getting back on track

Fitbit stock moved higher in three of the past four months, and that momentum was building with the the shares trading higher in December before Tuesday's downgrade. Duffy is sticking to his earlier price target of $6, a goal that suggested healthy upside when Fitbit bottomed out below $5 in June. But that's a different story now, with the stock hitting a 10-month high of $7.32 last week. 

The divide between $5 and $7.32 may seem wide now, but it was a rounding error when the stock was trading north of $50 shortly after its 2015 IPO. Fitbit's cruel plunge follows the waning popularity of its one iconic wristband that tracks several things, including steps, calories burned, heart rate, and sleep quality. 

But just because Fitbit stock bounced back ahead of the slide doesn't mean the niche is back in fashion. Revenue plunged 22% in its latest quarter. The company posted a small adjusted deficit of $0.01 a share, but Fitbit hasn't posted a profit in each of the past four quarters.

That also doesn't mean the recent rally before last week's slide is a trap. The stock peaked a year before sales topped out, so it's not a surprise to see the shares rising before a potential turnaround has actually materialized. 

Bulls are hoping that this quarter's release of Ionic, Fitbit's first true smartwatch, will help offset the sliding sales of fitness bracelets, but we won't know how that plays out until early next year. Fitbit's guidance in early November was calling for $570 million to $600 million in revenue. It rang up $573.8 million in revenue, so this should be Fitbit's first quarter of year-over-year growth in more than a year. The high end of Fitbit's bottom-line outlook calls for a return to profitability, but we're obviously coming off depressed results a year earlier on both ends of the income statement. 

There are still a lot of questions heading into 2018, even if it returns to profitability and revenue growth in the year ahead. Can Ionic be a game-changer? Will its digital health initiatives move the needle? Will more companies subsidize Fitbit purchases to promote healthier lifestyles, offsetting the retail weakness? New products routinely account for the lion's share of sales, so can Fitbit innovate in 2018? There are no clear answers to any of these big questions, but these are the factors that will ultimately define if the stock bounces back from last week's downgrade.