Garmin (NASDAQ:GRMN) is a puzzling stock. The company's business centers around selling dedicated GPS devices. Given the widespread adoption of smartphones and tablets (complete with built-in GPS functionality), it's hard to see how there's still a market for Garmin's products.
Yet, although the company isn't thriving, it's far from dead. Shares are actually up more than 25% in the last two years. So what's going on?
Garmin's navigation systems aren't the only devices the company sells, but they do represent a big chunk of Garmin's business. In fiscal year 2012, the company's automotive/mobile segment generated 55% of net sales and more than one-third of its operating income.
Garmin sells its Nuvi direct to consumers, but also has deals with major automotive manufacturers like Chrysler and Mercedes-Benz. As demand for autos has rebounded in the U.S., it has likely supported Garmin's automotive business.
Last year, U.S. auto sales rose 13%, and that growth has continued through 2013. In July, auto sales accelerated to levels not seen since 2007. But as the average car on the road is still roughly 11 years old, strong automotive demand could continue for some time.
Apple's automotive ambitions
Even if you have GPS on your phone, you might still want a system in your car. But what if your phone could take over your car's console? That's precisely what Apple (NASDAQ:AAPL) plans to do.
iOS 7, the next update to the Cupertino, Calif. tech-giant's mobile operating system, includes a feature called iOS in the Car" Starting next year, models from more than a dozen different brands will allow for deep iOS integration.
Should you happen to own an iPhone and one of these cars, you'll be able to beam a stripped-down version of your phone to your car's touch screen, and from there, access Apple Maps, Apple's own navigation system.
Obviously, this isn't going to wipe out Garmin's automotive business overnight. But Garmin investors have to see this a significant threat in the long run. Apple has called iOS in the Car a "key focus."
That makes sense. If you happen to own one of these cars, you might be tempted to get an iPhone. If you already own one, you'll be more likely to keep coming back to Apple for more. As some consumers plan to keep their new cars for a full decade, iOS in the Car could create long-term Apple customers and enhance Apple's halo effect.
Garmin's other segments
But there's a lot more to Garmin's business than personal and in-car GPS systems. The company also sells products targeted at outdoorsmen (highly precise personal units for hikers and hunters), as well as GPS systems for boats, planes, and runners.
This last category -- the segment Garmin defines as fitness -- accounted for 12% of the company's revenue in 2012 and about one-sixth of its operating income. Garmin sells a lineup of watches targeted at athletes. They have different features, but for the most part, they let users monitor their heart rate and track their pace.
But here. too, other companies appear poised to move into Garmin's territory.
Nike's digital platform
Nike's (NYSE:NKE) FuelBand and Nike+ devices aren't as nice as Garmin's Forerunners. The later offers functionality that Nike's devices lack, like the ability to monitor one's heart rate. But they are competitors to some extent. More importantly, Nike appears to be in the wearable game for the long haul.
The company has an entire division -- Nike Digital Sport -- dedicated to wearable devices. Earlier this year, Nike rolled out a developer API with the goal of creating an app ecosystem for Nike's budding tech platform. Nike has also created a start-up accelerator aimed at "leveraging the Nike+ platform," and in May, Nike announced that it would invest in 10 start-up companies.
The next version of Nike's FuelBand is rumored to include, among other things, support for these third-party apps as well as a heart-rate monitor. If that's the case, Nike's digital ambitions could prove to be an existential threat for Garmin's fitness division.
In addition to the threat posed by Nike, there has been much speculation regarding an Apple smart watch, which could be yet more competition for Garmin's Forerunners.
Investing in Garmin
While one might've expected Garmin to have fallen by the wayside, strong automotive demand and growth in its other product categories have pushed shares higher over the last two years.
Still, longer-term, Garmin appears to be facing major challenges from Apple and Nike. Apple's iOS in the Car could take a bite out of Garmin's automotive/mobile division, while Nike's budding digital platform could wreck havoc on Garmin's fitness products.
Cumulatively, those two divisions represent almost 60% of Garmin's revenue and about half of its operating income. Garmin investors, then, should keep a close eye on these developments. They might not represent a threat to Garmin right now, but the company appears to be facing major long-term challenges.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and Nike. The Motley Fool owns shares of Apple and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.