Better Buy: Fitbit Inc. vs. Garmin Ltd.

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 1.06%) 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:

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) 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.

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.