Garmin (NASDAQ:GRMN) and Fitbit (NYSE:FIT) both recently posted solid third quarter numbers that beat analyst expectations. Garmin's revenue rose 8% annually to $810 million, beating expectations by $28 million, while its non-GAAP EPS grew 30% to $1.00 and topped estimates by $0.24.

Fitbit's revenue rose less than 1% to $394 million, but still beat expectations by $12 million. It also posted a non-GAAP profit of $0.04 per share, compared to a loss in the prior year quarter, which cleared estimates by $0.08.

A young woman checks her fitness tracker.

Image source: Getty Images.

Garmin's stock rose slightly after its report, but Fitbit's stock skyrocketed 26% thanks to Fitbit's surprising return to profitability. But after those post-earnings bumps, which stock is the better all-around investment?

Comparing Garmin and Fitbit's business models

Garmin and Fitbit are often considered rivals in the wearables market. IDC ranked Fitbit as the world's third largest wearables maker during the second quarter with 9.5% of the market, while Garmin ranked fifth with a 5.3% share. Apple (NASDAQ:AAPL) and Xiaomi (NASDAQOTH:XIACF) sat at the top of the market with 17% and 15.1% shares, respectively.

Yet Garmin generates less than half of its revenues from wearable devices. During the quarter, 23% of its revenues came from the Fitness unit, which sells basic Vivo fitness trackers, and 26% came from its Outdoor unit, which sells higher-end GPS smartwatches like the Fenix 5 Plus.

The rest of Garmin's revenue comes from its Marine, Aviation, and Auto GPS devices. The Auto GPS unit remains larger than those other two units, accounting for 20% of its revenues, but it's been consistently shrinking due to the rising use of smartphone navigation apps and in-dash GPS systems. However, Garmin has consistently offset the declines at its Auto business with impressive growth across its other segments:

 

Revenue

Year-over-year growth

Fitness

$190.2 million

14%

Outdoor

$209.4 million

13%

Marine

$98.8 million

28%

Aviation

$146.4 million

17%

Auto

$165.2 million

(16%)

Q2 revenue growth. Source: Garmin Q2 report.

Fitbit generates nearly all of its revenues from its fitness trackers and smartwatches. Fitbit's main strategy is to pivot away from the saturated fitness tracker market with higher-end smartwatches, like the Versa, and higher-end fitness trackers with smartwatch-like features, ilke the Charge 3. Fitbit claims that it's now the second largest smartwatch maker in the U.S. after Apple.

Fitbit Versa.

Fitbit Versa. Image source: Fitbit.

49% of Fitbit's revenue came from smartwatches during the third quarter, compared to just 10% in the prior year quarter. That improved product mix boosted its average selling price per device 3% year-over-year to $108, and indicates that its brand still has pricing power against the Apple Watch.

However, Fitbit's shipments and revenue growth simply aren't that impressive compared to the growth of Garmin's Fitness and Outdoor units:

 

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Shipments

5.4 million

2.2 million

2.7 million

3.5 million

YOY growth

(16.9%)

(26.7%)

(20.6%)

(2.8%)

Revenue

$571 million

$248 million

$299 million

$394 million

YOY growth

(0.5%)

(17.1%)

(15.3%)

0.3%

Source: Fitbit quarterly reports.

Simply put, Garmin is a company that consistently generates positive sales and earnings growth as it pivots away from a core legacy business, while Fitbit is merely clawing its way back from the brink. Garmin's diverse range of wearable products also seems better insulated from Apple's smartwatch blitz than Fitbit's high-end smartwatches.

As a result, Garmin has much higher margins than Fitbit. Garmin's GAAP gross margin rose 120 basis points annually to 59.4% last quarter, while Fitbit's slid 550 basis points to 39% on the same basis. On a non-GAAP basis, Fitbit's gross margin fell 510 basis points to 40.1%. Garmin also pays an attractive forward dividend yield of 3.4%, while Fitbit has never paid a dividend.

The outlook and the valuations

Garmin and Fitbit are both expanding their software ecosystems with acquisitions, but those new platforms probably won't generate enough revenue to reduce their dependence on hardware sales anytime soon.

Looking ahead, analysts expect Garmin's revenue and earnings to rise 3% and 2%, respectively, next year -- which are a bit low relative to its forward P/E of 20. Analysts expect Fitbit's revenue to rise 4% next year and for its net loss to narrow, although those estimates could be revised after its surprise profit. Fitbit's stock looks cheap with a P/S ratio under 1, but its turnaround still isn't guaranteed.

I personally wouldn't buy either stock today. Garmin looks like a stable income play, but there are plenty of high-yielding stocks trading at lower valuations, and Fitbit's future still looks murky. If I had to choose one over the other, I'd stick with Garmin -- but I'd only buy it after its stock cools down a bit.

 

Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Fitbit. 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.