Since the late 1980s, Garmin (GRMN) has built a solid business leveraging GPS (global positioning system) technology. But lately, the company has been going in the wrong direction, and investors are getting antsy.
In early Thursday trading, Garmin stock fell as much as 9%, bringing the year-to-date returns to a disastrous -21%.
What’s going on with Garmin stock, and will the company be able to reroute?
Well, let’s take a look at the latest piece of bad news — a warning on earnings. GRMN estimates that Q2 revenues will be in a range of $770 million to $775 and earnings per share (EPS) at 70 cents to 72 cents. Yet the Street was looking earnings of 89 cents. That’s a substantial gap, and one investors can’t possibly overlook.
Garmin also lowered its forecast on a full-year basis, as the company now believes that earnings will come to $2.65 per share. This is down from the prior estimate of $3.10. GRMN did not change its revenue estimate of $2.9 billion.
As should be no surprise, currency volatility is a key factor for Garmin’s sagging earnings. For example, the company believes that foreign exchange has resulted in a $55 million to $60 million cut in revenues for Q2.
But even currency isn’t the main concern for investors in Garmin stock. The much bigger problem is all the intensifying threats to the core business.
The Bad News for Garmin Stock
In the preliminary earnings release, GRMN hinted at those threats, mentioning that there was “a more promotional pricing environment in the fitness segment.” That fitness category accounts for roughly 21% of overall revenues.
Of course, the recent launch of the Apple (AAPL) Watch is another threat to Garmin stock. While the sales may not necessarily be robust, it’s a good bet that the company will still sell plenty of devices.
At the same time, Fitbit (FIT) continues to gain ground. Keep in mind that the company has a whopping 85% of the U.S. market, according to NPD Group. And now that the company has gone public, there should be even more brand exposure — and Fitbit will have resources to continue investing aggressively in its products.
Now there are some bright spots for GRMN stock. For example, revenue growth for the marine division is expected to surge by 40% in Q2 because of new product introductions. Unfortunately, the segment accounts for a mere 9% of sales.
As for the second half of this year, GRMN remains upbeat about the fitness category. The company says it has some exciting products that will hit the market, and there are plans to ramp up advertising spending. But again, Apple and Fitbit are getting much of the attention.
In other words, if the new Garmin products turn out to be duds, the stock could see even more downside. And given that the company does not have a history of creating cool and engaging consumer products, it seems like things could get worse from here.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
