Please ensure Javascript is enabled for purposes of website accessibility

Smartwatch Sales to Double in 5 Years. Here's the One Stock to Buy

By Rich Duprey – Apr 6, 2018 at 8:06AM

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

The stock may not be as obvious as you think.

The market for smartwatches doesn't appear to be slowing down anytime soon. Research analysts at IDC say the global market for wearable devices is expected to grow 15.1% in 2018, hitting a total of 132.9 million smartwatches, fitness trackers, and watchbands, and that it should deliver compounded annual growth rates of more than 13% over the next five years, reaching 219.4 million units by 2022.

While a rising tide may lift all boats, it's expected that the most prominent manufacturers will be the biggest beneficiaries. Apple (AAPL -1.26%) is seen as gaining the most from this growth, because the Apple Watch accounted for almost half of all smartwatches shipped in 2017.

Although IDC expects Apple to continue leading the pack, it also anticipates Fitbit (FIT) and Garmin (GRMN 2.72%) gaining ground too, and it's in that second tier that investors should look for opportunities.

Woman in fitness clothing looking at a smartwatch

Image source: Getty Images.

Trackers for everyone

Smartwatches are expected to have the highest average selling prices over the forecast time period, and are expected to account for more than two-thirds of the dollar value of the entire wearables market. Fitbit's new Versa smartwatch may be the device it needs to stem hemorrhaging sales, but it may be too little, too late. Garmin's family of wearables can effectively challenge both Fitbit and Apple for market share, and Garmin has other advantages besides.

Garmin remains the go-to device maker for serious athletes, and it should benefit from the increasing functionality it is adding to its devices. Last summer it introduced three new Vivo-branded wearables that offer a broad spectrum of uses, from fashionable styling to pure fitness and activity tracking. A feature-rich platform and extra-long battery life, coupled with an expanding list of contactless payment partners, make them contenders for consumer attention.

IDC's senior research analyst for mobile device trackers, Jitesh Ubrani, said, "At present, fitness uses lead by a mile but mobile payments and messaging are starting to catch on." Garmin Pay now supports Mastercard, Visa, and Wells Fargo.

More than just wearables

However, what makes Garmin a more attractive investment than Fitbit is that it has more to offer than simply wearables. While they're an exciting and growing component of Garmin's business, contributing significantly to its fourth-quarter revenue growth of 16% in its outdoor segment and leading to a 1% increase in fitness revenue, investors also have exposure to the aviation, marine, and automotive markets.

Garmin watches and trackers

Image source: Garmin.

Aviation may not be its biggest market, but Garmin saw solid 14% growth in the segment as revenue ran over half a billion dollars in 2017, while the even smaller marine division saw a 13% jump in revenue. Those segments provide a substantial buffer to the more competitive auto market, where the company took a hit as auto revenue dropped 15% for the year. But the potential for Garmin to capitalize on self-driving cars, despite recent setbacks from fatal crashes, makes this market a long-term play.

Fit for growth

Similarly, I think we'll see Garmin's market share in fitness -- its biggest operating segment -- reverse course and start to grow again, as the enhanced functionality of its devices catches on. It will still live in the shadow of the Apple Watch, but Garmin's wearables are more compelling than Fitbit's, and Fitbit may not be able to halt the slide in its share.

Fitbit's stock may be beaten down, but Garmin's own low valuation makes it the more attractive play, as does its current annual dividend yield of 3.6%, something Fitbit is unlikely ever to be able to offer.

Investors buying into Garmin are betting on the continued popularity and growth of the wearables market. But they're doing so with the support of a well-diversified business model that makes the company a potentially steady performer for long-term gains.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, Mastercard, and Visa. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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
$83.90 (2.72%) $2.22
Apple Inc. Stock Quote
Apple Inc.
AAPL
$149.84 (-1.26%) $-1.92
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
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

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.