Garmin's Struggle to Remain Relevant

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Garmin (Nasdaq: GRMN  ) barked as loudly as it could this week, and not a soul was around to hear it.

The manufacturer of the once-hot navigation devices for automobiles announced that it was purchasing a rival German navigation company, Navigon, for an undisclosed amount. Navigon has downloadable applications in place on Apple's iPhone and Google's Android operating system, which should help generate a new revenue stream for Garmin. But is this really going to be enough to keep Garmin relevant?

Probably not.

The majority of Garmin's revenue is still derived from the highly competitive automotive GPS market. Revenue in this segment showed a year-over-year uptick in its most recent quarterly filing. That result was a surprise to many, including myself, but what came as no surprise was the 91% freefall in operating income. Overall operating margins also fell to 15% from 19%, while gross margins dove 700 basis points to 47%.

It's becoming apparent that with increased competition from Netherlands-based TomTom, and low-priced or free navigation applications being offered on smartphones from Apple, Android, and Research In Motion's (Nasdaq: RIMM  ) BlackBerry, that Garmin is going to turn to acquisitions to try to grow. The question is how many companies can Garmin buy if the revenue stream for the bread-and-butter portion of its business is contracting.

Since 2008, Garmin shareholders have suffered through a painfully slow series of product developments and a contracting revenue stream. Garmin is priced inexpensively compared with its peers, at only 14 times forward earnings, but consider that revenue has fallen for the past two years, and that analysts predict another two-year decline, and you can see why this one may not be done falling.

Garmin has been unable to differentiate to consumers why it's worth dropping potentially more than $100 on its automotive GPS devices when they could just as easily click a few buttons on their phones for free. This mentality has all the makings of slowly killing off Garmin's primary revenue stream and perhaps even choking off the company's only redeeming quality -- its dividend.

What do you think of the direction Garmin is headed? Share your ideas in the comments section below, and consider adding Garmin to your watchlist to keep up on the latest news in the navigation sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Google and Apple, as well as creating a bull call spread in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never stops to ask for directions.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2011, at 10:20 PM, mracz425 wrote:

    Maybe if Garmin and RIMM merge...both companies MAY become relevant again lol.

  • Report this Comment On June 19, 2011, at 11:25 PM, failosopher wrote:

    i'd wait until grmn's price drop to the fair value of its automobile oem business. then i will consider taking an indepth look into it

  • Report this Comment On June 19, 2011, at 11:50 PM, topsecret10 wrote:

    Garmin Is going going gone within 5 years My phone mounts on my car windshield and I get great directions (by voice) Short the stock and kick back ...

  • Report this Comment On June 20, 2011, at 4:00 AM, Trevigiano wrote:

    Garmin is heeding to total idiocy.

    After thy came out with GPS they stopped working and started to live on income.

    Actually free IPhone applications are ten years over Garmin.

    They must change or fail, they must become an officinal of ideas, so auto learning, intelligent planning respect time and day: Even an idiot Gaming must understand, to go around town at midnight, traffic is different than at twelve.

    Gyroscope so in galleries it doesn’t become fool, a minimum criterion with POI: they list Restaurants like a fool without any valuation.

    So, long story short, they actually are at Stone Age of GPS.

  • Report this Comment On June 22, 2011, at 11:43 PM, Anoxic wrote:

    Umm... ya, the Garmin short story was over 3 years ago.

    Garmin has 4 distinct units. The current estimates assume automotive will make $0. Which it doesn't and actually grew last quarter.

    Last I checked.... marine, fitness and aviation are going to be cash cows in the future. Try doing that on your iPhone. Good luck shorts but that ship has sailed ages ago.

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