Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Fitbit Inc. vs. Garmin Ltd.

By Demitri Kalogeropoulos - Apr 6, 2017 at 7:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stacking the GPS giant up against its struggling -- but far cheaper -- rival.

With the benefit of hindsight, it's clear that the better recent stock buy in the wearables space has been GPS device specialist Garmin (GRMN 1.26%) over former market darling Fitbit (FIT). It turns out that Garmin's diverse product line helped it weather collapsing sales in its core automotive division. Targeted innovation bets by Fitbit management, on the other hand, failed to hit the sweet spot of consumer demand amid rising competitive threats.

But investing is all about the future, so today, I'm looking at which device maker is the better bet for investors right now.

Here's a big-picture look at how the two companies stack up against each other:

Metric

Garmin

Fitbit

Market cap

$9.4 billion

$1.3 billion

Sales growth

7%

17%

Gross profit margin

55%

39%

Price-to-sales ratio

3.2x

0.6x

Forward P/E ratio

19

N/A

52-week price performance

27%

(61%)

Sales growth and profit margin are for the past complete fiscal year. Data sources: Yahoo! Finance, company filings, and S&P Global Market Intelligence.

Hits and misses

Fitbit's latest operating results describe a company in crisis. It sold 21% fewer devices over the critical holiday period in 2016, which was the key reason sales growth collapsed to a 17% pace from 149% in the prior year. The company also had to slash prices to account for the sharply lower demand, so gross profit margin dove to 39% of sales from 49% a year ago. 

FIT Revenue (Annual YoY Growth) Chart

FIT Revenue (Annual YoY Growth) data by YCharts.

In comparison to that dismal track record, Garmin's management team looks positively brilliant. Executives made smart investments in the wearables space in the two years preceding 2016's holiday outing, and the result was impressive. Revenue in the fitness category jumped 20% to help overall sales rise 10%. The wearables category also posted an increase in profit margin to 52% of sales -- not far from the broader company average of 55%. 

Positioned to succeed

Another reason to favor Garmin over Fitbit is its far more diverse business. The fitness category recently passed a declining automotive segment to become its biggest single division. Yet the company also markets its GPS devices in a wide range of smartwatch segments in addition to both the marine and aviation industries.

A woman jogging while checking her fitness tracker.

Image source: Getty Images.

As a result, no single division accounted for more than a third of revenue last quarter. And while that ensured that sales growth would be muted, it also protected the company from a sharp downturn in any one of its segments.

In contrast, 96% of Fitbit's sales over the holidays came from just four products: the Charge 2, Alta, Blaze, and Flex 2. That level of focus can pay dividends when you're on an innovation hot streak, but investors saw the flip side of that approach this past year.

Fitbit executives are working on spreading out their bets into areas like smartwatches, software, and enterprise health even as they slash operating expenses to better match costs with the current depressed level of demand.

The better value

Wall Street pessimism has made Fitbit the far cheaper company today, given that shares are valued at 0.6 times revenue, compared to Garmin's 3 times price-to-sales ratio. That gap could set up a potentially lucrative long-term bet for investors with high risk appetites.

After all, even though Fitbit is predicting a second straight year of net losses in 2017, it owns the strongest brand in the wearables space to go along with its impressive active user base of 23 million fitness fans who might soak up its next popular device release.

I'd stay away from the stock, though, at least until the company demonstrates through several consecutive product introductions that it has a good reading on what shoppers are demanding. Between a steadily growing, profitable device maker, and one whose business requires a dramatic reboot to stay relevant, it's an easy choice to favor Garmin over Fitbit today.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Garmin Ltd. Stock Quote
Garmin Ltd.
GRMN
$100.13 (1.26%) $1.25
Fitbit, Inc. Stock Quote
Fitbit, Inc.
FIT

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.