Fitness tracker maker Fitbit (NYSE:FIT) and action-camera leader GoPro (NASDAQ:GPRO) share several similar traits. Both companies have a first-mover advantage in their respective markets, but both face the threat of cheaper rivals and smartphones that could render their market-leading products obsolete. Both companies are expanding their product lines to appeal to more users, but both stocks have stumbled significantly from their post-IPO highs.

But if we dig deeper, we'll see that one of these stocks might bounce back faster in 2016.

Source: Company websites.

Fitbit's strengths and weaknesses
Last quarter, Fitbit's revenue rose 168% annually to $409.3 million and beat estimates by $58.3 million. Net income more than doubled to $59.2 million, or $0.24 per share, exceeding expectations by $0.14. Research firm IDC recently noted that Fitbit's worldwide shipments more than doubled annually to 4.7 million units during the third quarter.

However, IDC also reports that Fitbit's market share fell from 32.8% to 22.2% during that period, because of the arrival of Apple (NASDAQ:AAPL) Watch and Xiaomi's $15 Mi Band. Apple only entered the scene this April, but it already controls 18.6% of the market. Xiaomi's share more than tripled annually to 17.4%. Between the third quarters of 2014 and 2015, Fitbit's gross margin declined from 54.7% to 47.9% A market-share decline coupled with a margin contraction have caused concerns that Fitbit's devices could be marginalized into the bargain bin.

Seventy-nine percent of Fitbit's sales last quarter came from the Charge, Charge HR, and Surge -- three devices that are trying to carve out a "sports performance" niche between low-end fitness trackers and high-end smartwatches. Fitbit sells these devices at relatively higher price tags between $130 and $250, but all three are actually lower-margin devices than the $100 Flex. If Fitbit is forced to slash those prices to compete against Xiaomi in the low-end market and Apple in the high-end one, its margins will probably contract again.

Xiaomi's Mi Band. Source: Xiaomi.

GoPro's strengths and weaknesses
GoPro's biggest strength is its brand, which has become synonymous with action cameras. The company respectively controlled 72.5% and 56.7% of the U.S. and global action-camera markets at the end of last year, according to IDC, and its six main cameras reach a wide range of price tiers between $130 and $500.

Last quarter, GoPro's sales rose 43% annually to $400.3 million but missed estimates by $33.3 million. On the bottom line, non-GAAP net income more than doubled to $36.6 million, or $0.25 per share, but also missed expectations by $0.04. GoPro's biggest blunder during the quarter was launching its tiny Hero 4 Session at $400 and failing to support it with adequate marketing.

After weak initial sales, GoPro slashed the Session's price tag to $300, a move that caused a $19 million writedown in the third quarter. GoPro then guided for a 17% annual decline in sales for the holiday quarter, because of a lack of new flagship devices. In early December, GoPro cut the price of the Session again to $200 in a desperate bid to clear out its inventory. Citigroup analyst Jeremy David estimates that move will reduce GoPro's revenues by up to $40 million during the fourth quarter..

Between the third quarters of 2014 and 2015, GoPro's non-GAAP gross margin rose from 44.5% to 46.8%. But GoPro's disastrous Session launch and those subsequent discounts indicate that market demand and margins could be peaking.

Mind the catalysts
Next year will be critical for both Fitbit and GoPro, which both must prove that they can withstand the competition, widen their defensive moats, and preserve their margins.

Fitbit investors should keep an eye on its sales to corporate wellness programs. Back in September, Target (NYSE:TGT) signed a deal with Fitbit to provide its fitness trackers to its 335,000 U.S. employees. Similar bulk orders from other big enterprise customers might help Fitbit widen its moat against Xiaomi and Apple. Fitbit's subscription-based services, which include access to a digital trainer and premium reports, could also help it diversify away from hardware sales and expand its ecosystem.

GoPro needs its drone, which will arrive in the first half of 2016, to diversify its top line away from action cameras. It also needs its next Hero flagship cameras to include enough meaningful improvements to persuade existing users to upgrade.

The valuations and verdict
Fitbit currently trades at 25 times forward earnings, while GoPro has a forward P/E of 17. Fitbit looks pricier, but analysts believe that it can grow its annual earnings by an average of 32% over the next five years, compared with a projected five-year growth rate of 23% for GoPro.

Fitbit isn't a stock for queasy investors, but I believe that it could climb faster than GoPro next year, thanks to its solid sales growth and enterprise expansion opportunities. I don't think GoPro's down for the count yet, but it must get its act together with the Karma drone and Hero 5 cameras before it can recover.


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.