Fitbit (NYSE:FIT) is the type of stock investors can talk themselves into. FIT stock can look cheap, trading at about 0.4 times its revenue, after backing out its net cash. Its cash, based on its fourth-quarter free cash flow guidance, by the end of 2018 should have reached roughly half the market capitalization of Fitbit stock. As a result,  FIT stock, at worst, will have a lot of time to turn itself around.

But I’ve long been skeptical toward Fitbit stock, and truthfully not all that much has changed. Aspects of Fitbit’s balance sheet and valuation are intriguing. FIT as a business, however, hardly looks attractive.

Its 2018 guidance suggest that its sales ended up declining last year. And its adjusted EBITDA was negative, even after excluding its nearly $100 million of share-based compensation.

But FIT can improve. Back in October, I even called out Fitbit as one of 16 potential turnarounds. But it will have to improve a great deal before its results can support the current price of Fitbit stock. And FIT still hasn’t shown nearly enough strength to cause investors to expect that improvement.

The Optimism Toward Fitbit Stock

There’s been some optimism toward FIT of late. Fitbit stock has risen 34% just since late October. A Q3 earnings beat certainly helped its cause. And as Larry Ramer pointed out a week later, it seemed like Fitbit was headed in the right direction while Apple (NASDAQ:AAPL) went the wrong way, a noted reversal from recent trends.

That said, this seems more like a “dead-cat bounce” for FIT stock than a real rally. The 34% gains have come off an all-time low for Fitbit stock. The shares are still down about 4% over the past year. FIT essentially hasn’t moved since the beginning of 2017, even as the broad markets in general and tech in particular have done quite well.

And FIT still remains a long, long way from supporting the current price of Fitbit stock.

The Financial Problem Facing FIT Stock

Fitbit’s obvious problem is that its business is declining. Its 2018 top-line guidance of about $1.5 billion is almost 20% below its 2015 revenue. Moreover, its 2018 gross margin should be down 700 basis points or so versus 2017 because Fitbit has lost its pricing edge amid competition from Apple and Garmin (NASDAQ:GRMN).

FIT is still unprofitable in terms of both operating income and EBITDA. Its cost cuts lowered its operating expenses by about 7% in both 2017 and 2018, assuming it meets its 2018 cost-cutting guidance. There shouldn’t be much more room left for additional cost savings, and Fitbit has to spend money to compete against its larger rivals.

To reiterate a point I’ve made before, it’s worth considering what would be required for FIT stock to have a still-rather-aggressive price-earnings multiple of 30. At the current price of FIT stock, in order to reach that multiple, FIT would require 19c of adjusted earnings per share. With 267 million shares and a 25% tax rate (both reflect the company’s guidance), FIT needs $68 million in pre-tax profit.

But its 2018 operating loss was likely at least $100 million, even excluding another $100 million of share-based compensation. So Fitbit has to add $168 million of profit – or 11% of its revenue – just for FIT stock to reach a P/E multiple of 30.

How, exactly, can it generate an additional $168 million of profit? Its operating expenses probably can’t drop much more. Its gross margin continues to decline, and pricing pressure will probably place a ceiling on that as well. If that’s the case, with a gross margin of 40%+, the company would have to increase its sales by about $420 million, or nearly 30%, with no associated increase in its sales, general and administrative costs.

Realistically, Fitbit needs its revenue to grow roughly 50%, given that its operating expenses have to start rising at least somewhat along with its revenue. And, in this model, that revenue growth would only support the current price of Fitbit stock.

The Bet on Fitbit Stock

That revenue growth seems unlikely to materialize. Fitbit is hoping to benefit from partnerships with insurers and corporations to drive demand for its products. But that demand can go to Garmin, Apple, and Samsung as well. And there seems little reason at this point to trust Fitbit to execute well.

So really the only bullish thesis for Fitbit stock that makes any sense is the belief that it can be acquired. It seems highly unlikely that Fitbit can grow enough on its own to support the current valuation of Fitbit stock. But could FIT be acquired?

Perhaps. But that, too, seems like a risky bet. Alphabet (NASDAQ:GOOGL,GOOG) could be a potential, logical acquirer, given its hardware aspirations. But it’s not as if Alphabet can cut Fitbit’s roughly $740 million of operating expenses by $100 million. Alphabet would still have to buy an unprofitable business that needs a turnaround.

Other companies potentially could be interested at some point, but FIT almost certainly has to show revenue growth and improve its margins first. And so we circle back to the company’s key problem.

FIT simply doesn’t have a very good business. Its sales are declining, and its competition is intense, while its execution has been subpar. And we’ve already seen the “commoditization” thesis play out with smartphones and upend Apple stock. The same “race to the bottom” pricing will hit wearables and smartwatches over time.

Despite all that, FIT stock, by any metric other than price-revenue, is sharply overvalued.

That’s a tough combination and one that needs to change. Truthfully, after three years of disappointing results by FIT, I see little reason to believe it will.

As of this writing, Vince Martin has no positions in any securities mentioned.