Fitbit (NYSE:FIT) is back to rummaging around the bottom of the barrel. The company has managed to re-secure some semblance of a growth story, but its stock keeps falling. The wearable tech outfit is making progress toward diversifying itself away from just device sales, but it may be some time yet before that translates to any returns for shareholders -- likely as much as five years.

A rosy outlook

Over the next five years, wearable technology -- which includes fitness trackers, smartwatches, headphones, and tech-enabled clothing -- is expected to reach 279 million annual units sold according to tech researcher IDC. That compares to just shy of 200 million expected units sold in 2019, good for an 8.9% per year growth rate if the forecast proves accurate.

That bodes well for Fitbit. The company sold 13.9 million devices in 2018, and followed that up with another 2.9 million units in the sleepy first quarter of 2019. Incidentally, 2.9 million was an impressive 32% rise over the same period a year ago, boosted by several new budget-oriented wristbands and smartwatches. Though a slew of other tech companies have entered the fray and eaten into what was once Fitbit's early lead in the wearable space, the company was in the number four spot as far as global market share goes at the end of 2018 -- trailing Apple (NASDAQ:AAPL) and Chinese tech manufacturers Huawei and Xiaomi.

Three Fitbit Versa smartwatches displayed in gray, black, and pink.

Image source: Fitbit.

A not so rosy performance

The continued proliferation of wearable devices looks like a good trend to get on board with, but actual results have been underwhelming. That's because average selling prices (ASPs) have been falling as wearables have gained in popularity -- the natural order of things when new technology goes mainstream. In fact, IDC expects ASPs to decrease about 5% from today's average prices by 2023.

As if to prove the point, Fitbit's first quarter 2019 revenue increased 10% even though the number of devices sold was up 32%. The culprit was lower ASPs, which were down 19% year-over-year to just $91 per device. Granted, the goal of selling cheaper devices is to get more users into Fitbit's ecosystem. While specific user count was not provided, management did say user count was on the rise.

And that will be the key to Fitbit securing growth over the next five years or so. Historically, Fitbit's revenues have been highly volatile, as they are dependent upon new device releases. Besides the gut-wrenching variability, gross margins just aren't that great, and it doesn't look like they'll be improving much anytime soon. During the first quarter total gross profit fell from 46% the year prior to 32.9%.

However, the more users Fitbit has, the better its chances of increasing its software and service revenue, a much more consistent source of income that carries significantly higher profits. Those services include Fitbit Health Solutions, a health and wellness service for users and employers alike. Details were scant, but management did say that Health Solutions revenue was $30.5 million during the first quarter (up 70% year-over-year) and on track to exceed $100 million for full-year 2019.

At least a portion of that annual increase in Health Solutions came via acquisition, but growth is growth, and Fitbit needs that consistently higher margin business. In five years' time the company needs to secure its position as part of the healthcare industry, rather than continue as a simple manufacturer of wearable devices. It's still early on in the transition, but Fitbit is making decent progress on that front. In five years I think Fitbit will still be around and holding its own. But with so much competition out there from elephants like Apple, I'm shying away from making Fitbit a top pick in the wearables movement.

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.