Image source: Getty Images.
When you're in the business of making new and exciting technology products, things can change fast. Before the iPhone came out in 2007, everyone needed a Garmin (GRMN 0.68%) GPS device to help them navigate the world. Then, in the blink of an eye, smartphones made them unnecessary.
Just two Christmases ago, GoPro (GPRO 11.85%) cameras were flying off of the shelf and the company's stock peaked at about $87 per share. Since then: misery. Following disappointing product releases and increasing competition, the company's stock has lost over 80% of its value.
But which is the better buy today? While there's no way to tell with 100% certainty which stock will be higher five years from now, I think there's an obviously superior choice.
Financial fortitude
Cash in the bank is a big deal, especially in the industries that GoPro and Garmin toil. Each company is -- to some extent -- heavily reliant on cranking out new products that wow consumers. If one of those products is a flop, it can create tight financial circumstances.
When these companies have cash on hand, it gives them flexibility to endure such periods, and allows them to get creative and take strategic risks. If they, however, are debt-heavy, even one disappointing sales cycle could lead to the outfit filing for bankruptcy.
Here's how GoPro and Garmin stack up in terms of financial fortitude.
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
GoPro |
$224 million |
$0 |
($338 million) |
($144 million) |
|
Garmin |
$2,440 million |
$0 |
$506 million |
$581 million |
Data source: Yahoo! Finance.
As you can see, both companies benefit from the fact that they carry no long-term debt. That lack of debt gave GoPro a little more flexibility in light of its struggles over the past year; interest expenses would have just weighed it down further.
But that doesn't mean it's the winner of this category. While Garmin is admittedly valued at seven times GoPro's market capitalization, Garmin is still the clear winner. With 10 times the cash, and more than enough free cash flow coming in the door, Garmin is in a much stronger position.
Winner: Garmin
Sustainable competitive advantages
If I were forced to make all of my decisions based on a single variable, this would be it. Often called a "moat" in investing circles, a company's sustainable competitive advantages are what separates it from the throngs of competitors. It is the special something that makes a company what it is.
With both companies, the moats are very narrow. While there's no one out there making cameras quite like GoPro's, the barriers to entry aren't very high, and the markets for both virtual reality and drone cameras -- two of GoPro's growth arenas -- are crowded. In addition, as the past year has shown, the action-camera market itself might not be as popular as once believed.
Garmin, on the other hand, has learned the hard way about moats. After the aforementioned drop with the onset of both the Great Recession and the ubiquity of smartphones, the company was forced to diversify itself. While Garmin's foray into fitness devices now accounts for a quarter of revenue, it also has divisions in outdoor, marine, auto, and aviation GPS devices.
Winner: Garmin
Valuation
Finally, we have valuation. While this is half-art, half-science, I think we have a clear winner when it comes to this competition.
|
Company |
P/E |
P/FCF |
PEG Ratio |
Dividend |
FCF Payout Ratio |
|---|---|---|---|---|---|
|
GoPro |
N/A |
N/A |
2.3 |
N/A |
N/A |
|
Garmin |
18 |
17 |
2.3 |
4% |
66% |
Data sources: Yahoo! Finance, E*Trade, Nasdaq, and SEC filings. P/E represents figures from non-GAAP earnings. N/A = Not applicable due to negative earnings and free cash flow.
On almost every metric, Garmin is the clear leader. In short, for the time being, GoPro is a mess. It's very difficult to value the stock based on eroding sales and a very uncertain future. While there's a possibility that it could end up being the more profitable stock, Garmin's shares are trading for a reasonable multiple while offering a 4% dividend, which the company has been able to comfortably pay from free cash flow over the past year.
Winner: Garmin
Final call: Garmin
Garmin is a runaway winner. There's certainly a potential future where GoPro stock outperforms Garmin, but that future is far less probable than one where buying Garmin turns out to be the better choice.
