Recent statistics from the two wearable rivals suggest that Garmin Ltd. (NASDAQ:GRMN) is winning the war against Fitbit Inc (NYSE:FIT), making a hypothetical long/short play between the two stocks a very interesting proposition.
However, thinking about buying Garmin and shorting Fitbit stock — and actually following through with it — are two entirely different beasts.
I have never shorted a stock and likely never will; I’m just not built that way. Whenever I’m asked by InvestorPlace, or any of the other financial publications I write for, to do a “sell” piece on a stock or a group of stocks, I always have a tougher time coming up with recommendations.
I like to write about stocks that I would consider owning; negative spin doesn’t enter my psyche. I can do it, it’s just harder.
This brings me to GRMN stock and FIT stock, the crux of this story.
In Q3 2016, Garmin shipped 1.3 million wearable devices, a 12.2% year-over-year increase. That compares to an 11.0% YOY increase for Fitbit. In Q2 2016, Garmin shipped 1.6 million wearable devices, a 106.7% increase over the same quarter a year earlier, while Fitbit shipped 5.7 million wearable devices, a 28.7% increase over the same quarter a year earlier.
So, in the nine months ended September 2016, Garmin shipped 3.8 million wearable devices, a 40.7% increase year over year. Meanwhile, Fitbit shipped 15.8 million wearable devices, a 21.5% increase year over year.
Between Q1 2015 and Q3 2016, Garmin’s market share dropped by 40 basis points to 5.7%. During the same 18-month period, Fitbit’s market share dropped 980 basis points to 23.0%.
Fitbit Stock Continues to Decline
Samsung Electronics (OTCMKTS:SSNLF) and the many others that compete for the 50% market share not held by Fitbit, Xiaomi, Garmin, and Apple Inc. (NASDAQ:AAPL) stand to benefit the most.
Garmin is a big company and wearables are but one of many revenue streams. A 40-basis-point decline isn’t a big deal for a company that generated $2.2 billion in revenue in the first nine months of fiscal 2016, an increase of 5.8%. If not for its auto segment (its largest by revenue), which saw a 17% decline year over year to $656.0 million, 2016 has been a winner.
Over at Fitbit, the top line has been outstanding, with revenue growing 39.3% through the first nine months of the year to $1.6 billion. However, it’s the bottom line that gets a little wonky.
In the quarter ended Oct. 1, 2016, Fitbit’s operating profit declined 33.1% to $44.4 million; for the nine months ended October 1, 2016, operating income declined 69.3% to $72.9 million. R&D, sales and marketing, and G&A expenses all have seen huge increases in 2016 as Fitbit struggles to remain on top of a wearables market that’s slowing faster than anyone expected.
InvestorPlace contributor Aaron Levitt recently discussed Fitbit stock in relation to a slowing wearables market; he was pretty blunt in his assessment of the job CEO James Park is doing guiding the company through a rough patch that’s seen FIT stock decline by 65% over the past year.
“Both eMarketer and IDC both cite smartwatches as the big reason for the declines,” wrote Levitt. “Consumers just can’t see the need for them as they overlap on features already found in smartphones. And when adding their heftier price tags, smartwatches are a fading fad.”
So, what does Fitbit do to counter the fact that wearables’ 2016 growth will be less than half the 60% projection at the start of the year? It buys not one, but two companies that make smartwatches.
Bottom Line on Fitbit and Garmin
If Fitbit continues to waste money on bad acquisitions and wasteful overhead that doesn’t move the needle, you can bet that Fitbit’s comfy cash position — $672 million in cash and marketable securities as of Q3 — will be gone faster than you can shake a stick at.
So, should you go long on Garmin? Absolutely. With $1.1 billion in cash and marketable securities, no debt, and an operating margin of almost 21%, GRMN stock is a long-term hold.
As for shorting FIT stock, I’m of two minds on this.
Yes, the shorts represent almost 36% of its float and its margins are about one-third Garmin’s, but with $3 in cash it’s got to be attractive to somebody in the industry — maybe even Garmin. That should keep Fitbit stock from dropping much farther.
So, I wouldn’t recommend investors buy or short Fitbit stock. Neither proposition looks like it will be a winner any time soon.
