Image source: Getty Images.
Wearable technology of any sort is a booming industry right now. From cameras that can capture everything, to fitness trackers that measure your vitals, to GPS devices that let you know exactly where you are, we are connected. Two companies at the forefront of this movement are GoPro (GPRO +10.14%) and Garmin (GRMN 3.70%).
While both players have endured rough two-year stretches, they are still big names in the industry. At these depressed prices, which is the better buy today? Here are three ways that we can try and answer that question.
Financial fortitude
When a company has cash on hand, it has options. When a company has debt, it doesn't. When the macroeconomic climate is rosy, the distinction doesn't really matter. But when things go south -- and they'll always go south at some point -- the difference is crucial.
Cash-rich companies can outspend their rivals, lowering prices to the point that competition goes out of business. They can also buy back shares on the cheap, or even acquire their competitors. Debt-rich companies, on the other hand, are forced to narrow their scope and focus only on making ends meet.
Here's how our two companies stack up:
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
GoPro |
$280 million |
$0 |
($215 million) |
($94 million) |
|
Garmin |
$1,050 |
$0 |
$501 million |
$505 million |
Data source: Yahoo! Finance. Net income and free cash flow presented on trailing-12-month basis.
It's a very positive sign that neither company carries any long-term debt, but Garmin is clearly in better shape than GoPro right now.
At the end of 2014, GoPro had $422 million in cash and equivalents. The bombing of the Hero 4 Session has reduced that amount by one-third. While hopes are high that the Hero 5, as well as GoPro's Karma drone, will turn things around, Garmin has much more stable streams of income right now.
Winner: Garmin.
Sustainable competitive advantages
Many investors refer to sustainable competitive advantages as "moats." In my eight years of investing, nothing has been a better predictor of a stock's long-term returns than the moat of the underlying company.
For GoPro, the company's brand is the key moat. Its cameras are by far the most popular on the market, and the company is trying to expand that moat by creating an ecosystem that includes editing devices and publishing of original content. If successful, these initiatives could create high switching costs for users. At the current time, however, GoPro is still vulnerable to seeing its technology commoditized by competitors with deeper pockets.
Garmin, on the other hand, has two key segments: wearable fitness tracking and GPS services (including outdoor, aviation, auto, and marine divisions). As in GoPro's case, its moat is based on market share. While the company is in a distant fourth place in wearable technology, it owns large swaths of the GPS market.
Overall, neither company has particularly impressive competitive advantages.
Winner: Tie.
Valuation
Finally, we have to determine how expensive each stock is. This isn't an exact science, but the four metrics below offer data points to give us a fuller picture.
|
Company |
P/E Ratio |
P/FCF Ratio |
P/S Ratio |
PEG Ratio |
|---|---|---|---|---|
|
GoPro |
N/A |
N/A |
1.8 |
2.0 |
|
Garmin |
18 |
18 |
3.1 |
2.8 |
Data source: Yahoo! Finance, E*Trade. P/E represents non-GAAP earnings. P/FCF = Price to free cash flow. P/S = Price to sales. PEG = Price/earnings to growth.
On the surface, Garmin appears to be the better bet -- as it is at least profitable. But when we look at projected growth rates, GoPro appears to be about 30% cheaper. That's largely because analysts are expecting GoPro to get a huge boost from the new pipeline of products being taken to market in time for the holidays.
But that boost is no guarantee, and even if this holiday season proves prosperous, the company will need to rely on blockbuster after blockbuster to justify a higher price. All in all, I'd call this a tie.
Winner: Tie.
According to these metrics, Garmin comes out ahead. It's worth noting that I actually own shares of GoPro, though they were bought based on the company's ability to create an ecosystem that would offer a bigger moat. I'm still holding on in hopes that founder and CEO Nick Woodman can turn things around. It's definitely a high-risk, high-reward situation that I'll need to constantly evaluate.
