There aren't a lot of companies that can go head-to-head with a company like Apple (NASDAQ:AAPL) and come out standing. But Garmin (NASDAQ:GRMN) seems to have done just that, facing Apple in auto GPS and now wearables like smartwatches.
Garmin's auto business has been in a long and slow decline, but the company's wearables are gaining momentum even as the Apple Watch's sales grow, which shows that there's strength in Garmin's wearables business.
Where Garmin is growing
Garmin's business is split into five categories today -- fitness, marine, aviation, outdoor, and auto. Auto is the only business in decline, with revenue falling 19% in the second quarter of 2018 to $180 million. This is a business in structural decline, so Garmin is just trying to milk it for everything it can. Outdoor was the second-worst-performing segment last quarter with 4% growth to $202 million, and while the segment includes some smartwatches, it's driven by non-smartwatch products.
Garmin's biggest and fastest-growing segment is fitness. It was up 24% to $225 million in Q2 and has become the company's most important business. The segment includes watches used for sports like swimming and triathlons, as well as lower-cost activity trackers that have become commonplace for modern consumers.
What's changed over the past few years is that the smartwatch-focused fitness segment is now driving financial results and overshadowing the legacy businesses in Garmin's portfolio.
Smartwatches will drive growth
You can see below that revenue has grown slowly over the past five years, but not at a rate that would wow any investor. Since smartphones became commonplace, there has been a slow decline in auto revenue, which has muted growth.
Even in results so far in 2018, Garmin is seeing smartwatches outperform. Management increased revenue growth expectations for smartwatches from 0% to 10% this year, and given the performance early in the year, that might be a lowball guess.
How Garmin stays ahead
What Garmin has managed to do is build a product line that's difficult for bigger competitors to break into. I mentioned that Apple Watch is a direct competitor, but Apple is building a watch for everyone while Garmin is building a watch for specific niches. A serious runner, swimmer, biker, or triathlete is more likely to use a Garmin watch for training and events than an Apple Watch.
The design choices Garmin can make in these niches are decisions Apple can't make serving a wider market. The battery size of the Fenix watch line, for example, makes the watches huge compared to the Apple Watch, but Garmin's watches need to last all day for a long race. That's not a choice Apple is ever going to make and leaves Garmin with a valuable niche.
Garmin's niche grows
I think Garmin's position in the smartwatch market will continue to grow in value as more users participate in endurance sports and find niche applications for watches. You can see above that Garmin has translated its position into rising margins and growing profitability. That should continue, so this is one smartwatch company that I wouldn't worry about competing against giants like Apple -- that's not something I can say for all of its peers.