IDC just released its first-quarter numbers for wearable device shipments through the first three months of 2018. The numbers aren’t too exciting, nor surprising. Worldwide shipments of wearables rose 1.2%, far slower than the year ago period’s growth of 18%. Basic wearables shipment volume fell more than 9%, while more complex smart wearables shipment volume rose more than 28%.
Interestingly, although watches and wrist-wear accounted for 95% of shipment volume, smart clothing shipments actually rose nearly 60% year-over-year.
As far as the top players in the market are concerned, here is IDC’s ranking of the top five wearables players:
- Apple Inc (NASDAQ:APPL) – 16.1% market share, +13.5% year-over-year
- Xiaomi – 14.8% market share, +2.3% year-over-year
- Fitbit Inc (NYSE:FIT) – 8.7% market share, -28.1% year-over-year
- Huawei – 5.2% market share, +147.0% year-over-year
- Garmin Ltd. (NASDAQ:GRMN) – 5.0% market share, +9.1% year-over-year
What are the investment implications of IDC’s Q1 wearables report?
Broadly speaking, a very clear divide is forming in the wearables market between winners and losers. Now is the time to invest in the winners, and ditch the losers.
Here’s a deeper look:
The Trends in Wearables
The most clear and obvious trend is the division between basic and advanced wearables.
Basic activity trackers, which were how Fitbit initially came to market and made a killing, are now a relic of the past. Hardly anyone is buying these basic activity trackers anymore, and huge declines in this segment of the market are causing growth in the whole wearables space to flatten out (up 27% in 2016, up 10% in 2017, and up a percent last quarter).
But advanced wearables, namely smartwatches, are growing in popularity. Growth is from a smaller base, so it isn’t enough to offset basic wearable declines. But 28% growth last quarter from smartwatches and other advanced wearables is still nonetheless impressive.
This trend will persist. There will continue to be an exodus from basic activity trackers to advanced wearables, and the smartwatch market will continue to grow at an impressive rate.
Beyond this shift, other trends in the wearables market include cellular connectivity, multi-purpose build-out, and improved data usage. About a third of devices shipped in Q1 included cellular connectivity, implying that wearables are becoming much more than just health and fitness trackers. They are morphing into multi-purpose devices. Moreover, these devices are collecting tons of data, and this data is proving to be useful in improving the health of its users.
Which Wearables Stock to Buy
Given the aforementioned trends, the list of wearables stocks to buy is pretty short, and includes Apple, Fossil Group Inc (NASDAQ:FOSL), and Garmin.
Apple is king of the wearables market because the company is king of smartwatches. In many senses, smartwatches are simply an extension of smartphones. Thus, if you have an iPhone and are interested in buying a smartwatch, chances are you will buy an Apple Watch.
This is why the Apple Watch has dominated the smartwatch market thus far, and also why this dominance will persist into the foreseeable future. That makes Apple stock perhaps the safest wearables stock to buy.
But not the one with the most upside potential. That title belongs to Fossil, the traditional watch giant that was initially killed by this transition towards smartwatches. From 2013 to 2017, FOSL stock dropped from $130 to $5.
But during this down-draft, the company was adapting. It was building out a portfolio of hybrid smartwatches which meshed smartwatch functionality with traditional watch style. This part of the market is now starting to take off, and Fossil’s numbers are rapidly improving.
That is why FOSL stock has more than tripled this year from $8 to $27. Considering that the stock’s peak was $130, this rebound through hybrid smartwatch adoption has plenty more room to run.
With respect to Garmin, the company has a vast portfolio of advanced devices which cover a wide range of applications. The numbers are pretty good with 11% sales growth last quarter and a near-200 basis point improvement in gross margins. And the valuation is rather reasonable, with the stock trading at under 20-times forward earnings.
Bottom Line on Wearables Stocks
Growth in the overall category is cooling off, but growth in the smartwatch and advanced wearables category is red-hot. As such, the smart investments in the category are investments into the companies behind smartwatches and other advanced wearables. That list is presently headlined by Apple, Fossil, and Garmin.
As of this writing, Luke Lango was long AAPL and FOSL.
