Who would have thought that Fitbit (NYSE:FIT) and Garmin (NASDAQ:GRMN) could end up competing against each other one day. When Fitbit was founded back in 2007 as a wearable technology start-up that was primed to shape the fitness tracker market, Garmin was busy making navigation and tracking products using global positioning system (GPS) technology for cars, motorcycles, boats, and planes.

But the arrival of smartphones put maps right into the hands of the customer, eliminating the need for stand-alone GPS-based navigation devices. So, Garmin had to reinvent its business, and given its expertise in GPS tech, wearables proved to be a logical choice. This put the unlikely competitors in each others' crosshairs. Both companies have had divergent fortunes in the wearables market so far, but which one of the two could be the winner in the long run? Let's find out.

Three young people running outdoors.

Image Source: Getty Images.

Wearables are Garmin's new forte

Garmin's outdoor and fitness segments have filled in big time for the decline in its automotive business. These two segments now supply around 43% of its total revenue and shot up over 20% annually during the latest quarter. Their combined revenue stood at $310 million last quarter, and is on track for more than $1 billion in annual sales thanks to the company's smart strategy of targeting both niche and mainstream markets with its devices.

The company's outdoor segment deals in premium wearable devices meant for activities such as underwater diving or navigating through unknown trails. For instance, the Descent dive watch gives underwater explorers a host of features that allow them to plan their dive on the go. The $999 watch has a battery life of up to 40 hours underwater, and it gives users the flexibility to receive text messages and emails right on the device, along with critical data such as dive time, water temperature, etc. This offering, along with other products such as the tactix Charlie outdoor navigation watch that sells for nearly $750, makes up the premium component of Garmin's wearables portfolio. Not surprisingly, the company's gross margin increased nearly 2 percentage points last quarter as consumers bought such expensive devices.

Through the fitness segment, Garmin sells multisport watches and cycling computers, among other products. It also provides users the ability to track and analyze their fitness data using the Garmin Connect platform. Now, Garmin is targeting the mainstream fitness wearables market through this segment, so it has kept prices lower than the niche-focused outdoor segment.

For instance, the Forerunner 645M running watch that Garmin recently started shipping is priced at nearly $450. The watch can store up to 500 songs, allowing users to listen to music without a smartphone. Moreover, with the integration of the Garmin Pay contactless payment system, fitness enthusiasts can go out on a run without needing to carry cash or cards.

Of course, Garmin's pricing is still on the expensive side if we consider that Fitbit's flagship Ionic smartwatch was launched at $300. But Garmin has managed to attract consumers despite its high prices thanks to the feature-packed devices in their product lines.

Fitbit is trying to turn around

While Garmin used wearables to resurrect itself, Fitbit was leading this market a few years back when demand for fitness trackers took off. In fact, the company once boasted of an eight-year tech lead in this market, but its fortunes fell by the wayside as soon as consumers started buying smartwatches instead of fitness trackers.

As a result, Fitbit's market share fell in half from 2015 to 2017, and it is now trying to gain back some credibility with its latest smartwatch -- the Versa. Fitbit initially took a crack at the smartwatch market late last year when it launched the Ionic, but steep pricing and lack of features, when compared to the likes of the Apple Watch, meant that the product underwhelmed.

So the company decided to climb down the ladder and came out with a budget offering in the form of the Versa. The good news is that this new offering has helped Fitbit improve its smartwatch sales and pricing. In fact, the company now gets nearly 30% of its revenue from smartwatch sales, and its average selling price has increased by 16%.

However, Fitbit is still trying to cut its teeth in smartwatches as it has been late to tap into this trend. Moreover, the company has to sort out its product lineup because it is still selling expensive fitness trackers that could lead to cannibalization of its other products, and it might need to offer discounts to clear inventories.

As such, Fitbit's streak of losses won't be ending anytime soon. In fact, despite higher average selling prices and an increase in smartwatch sales last quarter, the company's adjusted net loss increased nearly 20% year over year to $41.1 million. The company's reliance on fitness trackers meant that overall device sales fell 26% year over year to 2.2 million units, which means that Fitbit has a long way to go before it can make a dent in the changing landscape of the wearables market.

The verdict

The clear winner of this showdown is Garmin. The company is witnessing a spurt in sales of its wearables devices, and most importantly, it has charted out a smart strategy of differentiating its premium and mainstream offerings that is proving to be profitable. Additionally, Garmin has the safety net of other fast-growing businesses such as marine and aviation that Fitbit lacks.

Not surprisingly, Garmin's operating income had increased 22% during the latest quarter to $142.2 million, while Fitbit was sitting on an $83 million operating loss. Finally, Garmin's trailing price-to-earnings (P/E) ratio of 20 is much lower than the industry average of 35, so investors can get into this profit-making and fast-growing wearables player on the cheap.