Apple Knocks Garmin’s Turnaround Story Off the Road

by James Brumley | June 13, 2012 6:30 am

GarminLogo Apple Knocks Garmin's Turnaround Story Off the RoadAssuming you’ve not been on a mission to Mars during the last couple of years, then you’re at least vaguely familiar with the phrase “There’s an app for that” — the running-joke-that’s-not-a-joke describing how smartphones like Apple’s (NASDAQ:AAPL[1]) iPhone and Samsung’s Galaxy can be made to do anything from recognize a melody to serve as a voodoo doll.

Oh, and these smartphones can perform some more practical functions too. Just ask the folks at Garmin (NASDAQ:GRMN[2]).

Prior to the advent of smartphones in 2007 with the debut of the first iPhone, Garmin was the name in portable global positioning systems (you know, GPS) and satellite-guided driving directions. However, once consumers started to realize smartphones could do the same — as well as play music, be a flashlight and even test the ripeness of a watermelon — the choice became something of a no-brainer: Smartphones win, and Garmin devices lose. The sales numbers and Garmin’s stock price since then have somewhat — though not radically — reflected that opinion.

Yet, knowing that all things are cyclical, one can’t help but wonder if the worst of the migration to smartphones as a GPS device is over. Said in plainer terms, could Garmin actually be a buy now?

Numbers Don’t Lie

In terms of earnings, Garmin’s best year ever was 2007. It cleared $3.80 per share that year, though the revenue peak was actually in 2008 with a top line of $3.5 billion. Either figure basically supports the notion that 2007 marked the beginning of the downturn, though, for stand-alone GPS as well as digital-roadmap devices. Both have fallen every year since then, save last year’s revenue, which was a tad better than 2010’s $2.69 billion.

The flipside: Although comparably capable smartphone usage has soared from zero in 2006 to the currently active user base of a little more than 1 billion (yes, 15% of the entire world’s population are smartphone users), not all of them have opted to use their phone over a devoted handheld GPS device. Indeed, surprisingly few of them have made the switch.

The proof of the pudding is in Garmin’s still-respectable numbers. Though last year’s $2.7 billion in sales is off the 2008 peak, it’s only 22% off that peak sales line. Even more compelling is the fact that unit sales are still accelerating for the company. Q1-2012’s 2.7 million devices sold[3] was 7% better than the year-ago number, though the sale rate has been increasing for a couple of years.

But wasn’t the widespread adoption of smartphones supposed to obliterate the now-obsolete device? Yes it was, but no, it didn’t. This is where things get interesting for investors.

Not As Good?

Not that smartphones haven’t taken at least a little wind out of Garmin’s sails (and sales), but with three years to study the impact, perhaps the smartphone isn’t as big of a threat as first assumed.

Consumers aren’t shy about telling you why either. Though clever, the fact of the matter is, most smartphones can’t do what hardcore hikers, drivers and lost people really need done[4].

As for an explanation of why GPS device sales haven’t skyrocketed along with smartphones, that’s relatively simple, too. Mobile phones are viewed as, and almost deigned to be, consumables; techphiles wouldn’t be caught dead with yesteryear’s iPhone. Global positioning toys and satellite-linked dashboard maps, however, don’t become obsolete as quickly as phones do. All things considered, though, GPS equipment sales have held up surprisingly well compared to mobile phone sales.

Could it be Garmin has a prayer after all? That might have been the case until Monday.

The End of an Era, the End of a Company

You hate to see it happen, but then again, it’s not all that unusual.

Yesterday, Apple announced it would be using TomTom’s comparable GPS technology[5] to power the related hardware in devices running its new operating system, iOS 6. In one fell swoop, the functionality gap that had so far been unfilled by tablets and smartphones — the gap filled by Garmins and Harman (NYSE:HAR[6]) devices — was filled. As Apple’s Senior VP of the new operating system Scott Forstall described, it’s a “new mapping solution built from the ground up.” And sure enough, it is, complete with the all-important turn-by-turn navigation feature.

The question is, just how much of a blow is Apple’s new maps app to Garmin’s actual revenue? That’s the part that makes you wince.

Recognizing that sales in certain areas were waning, the company was in the midst of a deliberate effort to bolster sales in the arena Apple just likely commandeered, crimping one of its last remaining lifelines. Ironically, had the company not waded into those waters and focused so deeply on the automotive market, and instead developed the daylights out of the sporting and high-end usage markets (like hiking and airplane and aquatic navigation), it’s a conversation that might be moot now. Ugh.

Garmin has publicly stated it doesn’t see Apple’s decision as a problem[7], though the rebuttal sounds and feels a little desperate, with a dose of denial. And it’s too bad, as Garmin was just starting to look like a decent turnaround story.

Now it doesn’t.

As of this writing, James Brumley did not own a position in any of the aforementioned securities.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. GRMN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRMN
  3. 2.7 million devices sold: http://news.cnet.com/8301-1035_3-57426126-94/after-23-years-garmin-reaches-100-million-devices-sold/
  4. most smartphones can’t do what hardcore hikers, drivers and lost people really need done: http://www.zdnet.com/blog/hardware/why-my-smartphone-hasnt-replaced-my-in-car-gps-receiver-yet/13472
  5. Apple announced it would be using TomTom’s comparable GPS technology: http://investorplace.com/2012/06/tomtom-signs-apple-maps-deal-tmoaf/
  6. HAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAR
  7. publicly stated it doesn’t see Apple’s decision as a problem: http://www.bizjournals.com/kansascity/blog/2012/06/garmin-says-it-will-circumnavigate.html?page=all

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