Shares of Fitbit (NYSE:FIT) have already plunged 40% in 2016 due to a triple whammy of bad news. First, its $200 Blaze smartwatch failed to impress analysts, who noted that it wasn't competitively priced against comparable devices, lacked a developed app ecosystem, and could cannibalize sales of the $250 Surge smartwatch.

Second, Under Armour (NYSE:UAA) unveiled a suite of wearable devices, including a $180 UA Band fitness tracker designed by HTC, data-tracking shoes, health-tracking headphones, and a wireless scale. That same week, Fitbit users filed a class action lawsuit against the company, claiming that its PurePulse Trackers did not accurately monitor heart rates.

Source: Fitbit.

Unflattering comparisons to action-camera-maker GoPro (NASDAQ:GPRO), which also crashed more than 40% since the beginning of the year, haven't helped. Both companies enjoyed strong initial sales in their respective markets, but now face the threat of commoditization without defensive moats. Let's discuss the three key lessons investors should learn from Fitbit's implosion.

1. Valuations matter
Even after falling 40%, Fitbit still trades at 30 times trailing earnings, which is considerably higher than the average P/E of 19 for the scientific and technical instruments industry. That multiple might look fair compared to Fitbit's 79% earnings growth last quarter, but analysts expect it to post only 12% bottom-line growth for the full fiscal year, which ended on Dec. 31.

Looking ahead, things look better. The stock trades at just 16 times forward earnings, and analysts expect it to post 32% annual earnings during the next five years. Based on that forecast, Fitbit has a five-year PEG ratio of just 0.5. Because a PEG ratio below one is considered undervalued, the stock can be considered quite cheap compared to its earnings-growth potential. However, investors should note that, if Fitbit misses earnings expectations or lowers guidance, those forward estimates could decline, and cause those multiples to rise.

2. Commoditization kills brand appeal
Fitbit and GoPro enjoyed a first-mover's advantage in fitness trackers and action cameras, respectively. Fitbit become synonymous with fitness trackers, and GoPro became a common label for all action cameras.

Fitbit grew its digital ecosystem with premium training and corporate wellness programs, and GoPro reinforced its brand with viral videos. However, once cheaper rivals entered the market with comparable products, that brand appeal started to wear off.

In December, research firm IDC reported that Fitbit's global market share in wearables had fallen from 32.8% to 22.2% between the third quarters of 2014 and 2015. During that period, Apple's (NASDAQ:AAPL) share rose from nothing to 18.6%, thanks to the Apple Watch, while Xiaomi's share more than tripled, to 17.4%, on robust sales of its $15 Mi Band. Many other companies like Fossil's (NASDAQ:FOSL) Misfit are now selling cheap wearable devices that offer comparable features to Fitbit.

Xiaomi's Mi Band. Source: Xiaomi.

That ongoing commoditization could cause Fitbit problems, because its non-GAAP gross margin already fell from 53.9% to 48.3% between the third quarters of 2014 and 2015. Selling lower-margin products and boosting marketing expenses will cause that figure to decline. Moreover, three "premium" devices -- the Charge, Charge HR, and the Surge -- generated 79% of Fitbit's sales last quarter. Competition from comparable devices like the Apple Watch, UA Band, and Android Wear devices could hurt sales of those devices.

3. Hope remains
While it's easy to dismiss Fitbit as a "fad stock" that will lose momentum as competitors flood the market, we shouldn't overlook its strengths. Although Fitbit lost market share during the past year, IDC also reports that its shipments more than doubled. That growth is reflected in Fitbit's third quarter, when revenue rose 168% annually, with triple-digit sales growth across all geographic regions. Sales of its devices during the holiday season were also reportedly robust.

Fitbit expects its full-year revenues to grow 140% annually compared to 178% growth in 2014, and 255% growth in 2013. What will happen in 2016 is less certain.

Fitbit bulls believe that, with increased marketing efforts and new products, the company might carve out a niche in "sports performance" devices, which are insulated from high-end smartwatches and low-end fitness trackers. Fitbit bears believe that the company's 2016 will look similar to GoPro's 2015: It will launch more devices to diversify its product line, but hit a brick wall as sales plummet year over year.

Is Fitbit the next GoPro?
Fitbit looks a lot like GoPro these days, but it hasn't made as many mistakes as the action-camera maker yet. Fitbit's corporate wellness plans can expand its market at a more stable rate than GoPro's nebulous plans for media, VR, and cloud growth.

Fitbit also hasn't launched a product as disastrous as GoPro's Hero 4 Session yet, although the Blaze could certainly flop. Looking ahead, Fitbit faces a lot of headwinds, but I wouldn't completely dismiss its chances of rebounding from these all-time lows just yet.

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.