Oct 6, 2015 ยท 5 minutes

If any recent tech IPO can offer private companies mulling an entry into the public stock market some encouragement, it's Fitbit.

The maker of health and fitness wearables made billions of dollars for its venture investors, surged 48 percent on its first day of trading and, four months later, is still trading close to double its $20 a share offering price.

With private companies valued at several billion dollars - nlike Square, Cloudera and Atlassian - expected to enter the IPO pipeline in coming months, Fitbit has shown that the public stock market isn't a terrible place to be, with analysts issuing a stream of bullish reports and investors willing to buy despite a PE ratio of 46.

There are signs that that may be beginning to change. Along with the liquid trading that a public market affords a company post-IPO comes exposure to short selling. Short sellers are investors who, betting that a company's stock price will fall in the near future, will borrow shares and sell them with the intention of buying them back at a profit.

And short sellers have been taking a keen interest in the company in the past few months. Short interest has risen from 3.3 million shares to 14.3 million shares in mid-September, according to data from NASDAQ. And according to Reuters, short interest may have grown another 50 percent since then.

After going public on June 17 at $20 a share, Fitbit's stock rose as high as $51.90 a share in early August. The stock peaked one day before the company's first quarterly earnings report and has since fallen as low as $31.25 a share (the stock closed Monday at $38.10 a share). It was right around that earnings report when the short interest began to increase.

Since then, the debate between bulls and bears over the stock's fate has only grown louder. The bears point out four basic vulnerabilities: The stock's high valuation, the threat of new wearables from Apple and Xiaomi, the risk that fitness trackers are simply a fad, and the money Fitbit must spend to differentiate its brand.

Competition is heating up in the wearable market even as big new players enter. According to IDC, the number of wearables shipped in the second quarter – a figure including fitness trackers as well as smartwatches - grew 223 percent to 18.1 million devices. Fitbit's shipments rose from 1.7 million a year ago to 4.4 million last quarter, a rise of 159 percent - impressive, but well below the growth for the entire market. As a result, its market share fell to 24 percent from 30 percent a year earlier.

That was largely because of two newcomers: Xiaomi and Apple. Xiaomi sold 3.1 million wearables, mostly fitness trackers, and Apple sold 3.6 million Watches. Some critics of the IDC data argued that the Watch was not directly comparable to a Fitbit device, which was designed to do only a few things but to them very well. That's a fair point, but that Apple and Xiomi were able to come out of nowhere to rival Fitbit in the market suggests that competition could increasingly be a troubling factor facing the company's growth plans.

If nothing else, the competition may continue to weigh on profits as price becomes more of a factor differentiating sales. Xiaomi's Mi Band may lack many features of Fitbit devices, but it sells for only $20, while Fitbit's products range from $60 to $250. On the premium end of the market is the higher-priced Watch, which offers more applications than a Fitbit, although health tracking apps remains among the most popular.

This situation is a familiar one in tech hardware. Apple's multi-function iPhone killed the mp3 player when it became clear users could have an iPod on their phone. And higher-end phone makers like Samsung saw their markets whittled away by lower-cost Android phones made by companies like – well, like Xiaomi. Right now, Fitbit's brand and technology are both strong enough to set it apart, but the bearish view is that these advantages will weaken over time.

If so, it could be accelerated by a tendency of fitness trackers to grow neglected over time. A recent survey by R W Baird showed 20 percent of Fitbit owners either rarely or never use their devices. Among those who had bought their devices two or more years ago, 46 percent said they don't use their Fitbits anymore. Fitbits are great at building fitness habits, but once those habits are established, people may not need devices to enforce them as much.

Those concerns may be emboldening the bears, but many Fitbit bulls have been vocal about the company's strengths. In the past month alone, four analysts have began coverage of Fitbit with buy ratings or lifted their ratings and price targets. (Two others, meanwhile, have started coverage with hold ratings.)

The bulls maintain that Fitbit's early entry in the market gives it a strong brand presence with consumers. They dismiss the threat of the Apple Watch. People buying Apple Watches may use the fitness apps, but those wanting a fitness tracker may regard the Watch as more than they need.

A Morgan Stanley survey showed that, even after the Watch's introduction, the share of consumers intending to buy a Fitbit rose slightly. And a Pacific Crest survey showed 65 percent of those wanting to buy a fitness tracker said they wanted a Fitbit. Neither showed signs of demand peaking, or of competition reducing interest in the brand.

A trend of companies with corporate wellness programs buying trackers could also add to sales. Last week, Target offered its 335,000 employees in the US Fitbit's trackers. Corporate wellness programs make up less than 10 percent of Fitbit's revenue, but it's one of the company's fastest growing segments.

The next few months will be key ones for Fitbit because it has been spending aggressively to strengthen its brand ahead of the holiday season. In 2014, half of Fitbit's annual revenue came in the fourth quarter. Last quarter, Fitbit's marketing expenses rose to 17 percent of revenue from 12 percent a year earlier, and the company warned that it would continue spending on marketing this year.

The next couple of quarters should give a clearer indication of who is right, the bulls or the bears. If the bears win and the short sellers succeed in driving down Fitbit's stock price, it could have an impact beyond the company's investors. It could also make other potential IPO candidates think twice. If Fitbit – with its current profit and revenue growth – can't thrive in this stock market, who can?