In 2016, Fitbit Inc (NYSE:FIT) revenues fell and FIT stock tumbled. Likewise, Garmin Ltd. (NASDAQ:GRMN) revenues soared and GRMN stock took off. The story line was crystal clear, but now there is a secular shift underway from Fitbit’s basic activity trackers toward Garmin’s more advanced wearable fitness devices.
After roaring some 30% higher in 2016, GRMN stock has been stuck in neutral so far in 2017. A strong fourth-quarter report in February caused shares to spike, but GRMN stock proceeded to give up those gains over the next several weeks.
Then Q1 results rolled in early in May 2017, and that threw a wrench in the once crystal clear story. Garmin’s fitness segment, which had morphed in a hyper growth darling of Wall Street during 2016, saw revenues decrease 3% in Q1. They were up 20% in Q4.
But investors weren’t shook by this. The multi-faceted growth story from the marine, aviation and outdoor segments seemed to outweigh the fitness segment’s sudden reversal. GRMN stock sold off some in early May, but quickly reversed after only a few days.
That doesn’t make sense to me, and I think GRMN stock in 2017 could look a lot like FIT stock did in 2016.
Garmin Needs Fitness to Bounce Back
Here’s the problem with Garmin: the company needs fitness growth to pick back up for revenue growth to be respectable. The auto segment, which comprised nearly a third of GRMN’s revenues in 2016, is in free fall. Revenues fell 19% in the first quarter of 2017. The big driver here is the contraction of the personal navigation devices (PND) market. Demand for PNDs has just withered away recently, and GRMN is feeling the brunt of it. The auto segment generated sales of $1.06 billion in 2015. This year, the segment is on track for sales somewhere around $700 million.
So how is GRMN filling that $300 million hole in the topline?
The company’s marine, outdoor and aviation segments are booming. Revenue growth for each of those th segments ranged from 16% to 26% in Q1. That is filling the hole, but it’s not driving much growth.
The difference maker here is the fitness segment. Fitness revenues rose 20% in Q4. That spilled into total revenue growth of 10%. Fitness revenues contracted 3% in Q1. That spilled into a measly 2% total revenue growth rate.
But Fitness Won’t Bounce Back
Given Fitbit’s fall from grace, I think investors have clear warning signs for Garmin: the wearables market is rapidly becoming too crowded.
While GRMN was initially a winner in the shift from activity trackers to more advanced wearables, the Q1 sales contraction of 3% implies that the company has now found itself on the wrong side of the shift. It really is starting to look like this advanced wearables market will be ruled by the few and powerful. Apple Inc. (NASDAQ:AAPL) reported that Apple Watch sales doubled last quarter.
Samsung Electronics (OTCMKTS:SSNLF) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) are also making aggressive excursions into the space with Tizen and Android Wear. Fossil Group Inc (NASDAQ:FOSL) is pivoting its entire focus to the smartwatch market.
As bigger, more competent, and more experienced players enter the smartwatch space, it will squeeze out the smaller, less competent, and less experienced players.
Bottom Line on GRMN Stock
Right now, it looks like GRMN could be squeezed out this year, much like FIT was squeezed out last year. At over 18-times next year’s consensus earnings, that is a huge problem for GRMN stock. It is also a huge problem considering the growth outlook is only 4% earnings growth per year over the next 5 years. That makes the multiple look insanely rich for the pedestrian intrinsic growth potential.
GRMN stock and FIT stock followed opposite paths in 2016. One rose more than 30%. The other lost about three-fourths of its value.
This year, though, I think both stocks will follow the same trajectory, and that is down. With a rich valuation, slowing sales growth, a bleak outlook, and intense competition, GRMN stock looks exceptionally dangerous at these levels.
As of this writing, Luke Lango was long FOSL and AAPL.
