Things looked bleak for Garmin (GRMN -0.36%) just two years ago. Its automotive GPS device business, which generated most of its revenue, was being disrupted by smartphone-based mapping apps. That pressure caused the stock to tumble from the low $60s in July 2014 to the low $30s by Jan. 2016. But since then, Garmin staged a remarkable rebound, rallying 26% year-to-date and outperforming the NASDAQ's flat growth.

Yet I believe that Garmin could still have room to run next year, for a few simple reasons.

Image source: Garmin.

Market share growth in wearables

The strongest reason for buying Garmin is its impressive growth in the wearables market, which is more commonly associated with companies like Fitbit (FIT) or Apple (AAPL 0.47%). That's because Garmin offers a wide variety of specialized wearable devices for certain activities -- like swimming, golfing, and jogging -- instead of "general use" devices which cover a wider range of activities with fewer features.

That approach helped Garmin grow its worldwide wearable shipments 107% to 1.6 million units between the second quarters of 2015 and 2016, according to IDC. That placed the company in fourth place in the overall market after Fitbit, Xiaomi, and Apple (in that order) with a market share of 6.9%. That growth also made Garmin the fastest growing wearables maker in the world.

In the smartwatch market, IDC reports that Garmin's shipments surged 324% to 600,000 units between the third quarters of 2015 and 2016. That growth, which again outpaced the growth of all other rivals, made Garmin the second biggest smartwatch maker in the world after Apple with a 20.5% market share. If Garmin's growth continues at its current trajectory, it could become a major threat to Fitbit and Apple over the next few quarters.

Garmin's high-end Fenix Chronos. Image source: Garmin.

Wearables growth is offsetting its auto weakness

Garmin's big wearables push has offset the ongoing weakness of its automotive GPS business. Last quarter, Garmin's automotive revenue fell 21% annually and accounted for 30% of its top line. However, that was a significant reduction from 40% of its sales in the prior year quarter.

Meanwhile, fitness revenue surged 32% annually and accounted for 26% of Garmin's top line, thanks to robust demand for its Forerunner and Vivoactive devices. Outdoor revenue, bolstered by strong sales of its rugged Fenix GPS watches, rose 28% and accounted for 20% of Garmin's top line. The marine and aviation GPS businesses, which are less prone to disruption from smartphone-based GPS apps, both reported double-digit sales growth.

All those positive tailwinds boosted Garmin's total revenue by 6% annually to $722 million. Analysts believe that Garmin's revenue and earnings will respectively improve 5% and 8% for the full year.

Low valuations, high dividends, and buybacks

That single-digit growth might not impress growth-oriented investors, but its trailing P/E of 18 is much lower the industry average of 31 for scientific and technical instrument companies. It's also comparable to Fitbit's P/E of 18.

Garmin also pays a hefty forward dividend yield of 4.2%, which is substantially higher than the S&P 500's average yield of 2.2%. Fitbit has never paid a dividend, while Apple (which is only an indirect play on wearables) pays a 2% yield. Garmin has raised that dividend annually for four straight years.

Garmin also regularly buys back stock to tighten up its earnings. Over the past 12 months, it spent 13% of its FCF on buybacks and 67% on dividends -- indicating that it still has room to raise both to boost shareholder value.

The bottom line

Garmin's growth and recovery over the past year demonstrates how valuable diversification is for hardware makers. If Garmin hadn't leveraged its strength in GPS devices to expand into wearables at the right time, its dying auto GPS business could have wrecked its top line growth.

Instead, its wearables business is now replacing the automotive one as its most important unit, and its top and bottom line growth are getting back on track. Combine that recovery with its low valuation, solid dividend, and long record of buybacks, and I believe that Garmin could be a compelling long-term buy at current levels.