Their businesses both took hits during the early days of the pandemic, but sports apparel and shoe retailer Nike (NYSE:NKE) and GPS technology specialist Garmin (NASDAQ:GRMN) each quickly returned to growth after the initial COVID-19 shutdowns. Those rebounds put the companies right back on the impressive paths that have made their stocks outperformers compared to the S&P 500 over the past five years.
But which one is a better bet for investors today?
Let's compare these companies, which each lead their respective industry niches, as potential stock buys.
Garmin has the operating edge
The edge goes to Garmin when it comes to the pace of recent growth. In the third quarter, the GPS device giant reported a 19% year-over-year revenue increase that put it on track to completely recover from the pandemic-necessitated retail closures. Nike, meanwhile, still hasn't returned to its prior expansion pace.
Garmin had entered the pandemic period with a slightly stronger track record, too. Its sales grew 12% in 2019, compared to Nike's 11% increase in its first half of fiscal 2020 (which ran through November 2019).
Garmin's streak of releasing popular devices such as fitness trackers and smartwatches has also made it significantly more profitable. Its operating margin has increased in each of the last four years and is on pace to drop only slightly during fiscal 2020. Nike, on the other hand, was enduring modest declines on this metric even before COVID-19 sent it far lower.
There's no shortage of reasons to like Nike stock today, though. For one thing, it's a much bigger and more diverse business with annual revenue around 10 times bigger than Garmin's $3.9 billion. Nike maintains several of the most valuable brands on the planet and dominates the worldwide market for athletic apparel. Garmin leads in some attractive product categories such as airplane navigation and cycling and hiking smartwatches, but these are smaller niches.
Nike's focus on apparel also helps make it a less risky investment than Garmin. Yes, they're both consumer discretionary niches. But Garmin competes mainly in the ultra-competitive consumer electronics arena and isn't nearly as established as a global brand.
If you're more interested in potential growth, then Nike looks like the clear winner. CEO John Donahoe and his team are predicting a sharp sales acceleration in fiscal 2021. They're also signaling that profitability could rise for several years as demand shifts away from its wholesale channel and toward direct-to-consumer sales. These are some of the same trends that have helped lululemon athletica generate faster earnings growth, which seems achievable for Nike.
As of late 2020, the stocks are valued roughly on par with each other, with Nike and Garmin each trading for about 6 times annual revenue. Those are premium valuations that reflect their many competitive advantages, including significant innovation leads in their respective industries.
That positioning makes it likely that both stocks will outperform the market from here, just as they have for the last decade. But if you're shopping for a larger, more stable business that could enjoy a record year ahead, then Nike is a great choice.
On the other hand, if you're aiming to make a focused growth bet on GPS devices and steady market share and profitability gains, then Garmin should get you where you want to go.