The fear of missing out is real in the stock market. As indexes rise, propelling many growth stocks higher, investors naturally wonder whether the biggest gains have already occurred for these promising businesses.
Garmin (GRMN 0.29%) is a good example of a surging growth stock. The GPS device giant's 27% rise in 2023 nearly doubled the rally in the S&P 500 to date. Garmin's third-quarter earnings report in early November contained lots of good news about the business, including an upgraded fiscal-year outlook following strong demand across most of its portfolio.
There could be much more room for the stock to rise from here, though. Let's look at a few reasons why the best is yet to come for Garmin shareholders.
It pays to be diverse
It can be difficult to generate sustainable sales growth in the tech hardware industry. Competition is fierce, and preferences change quickly, and these factors help explain why there's so much turnover among popular brands. Garmin demonstrates that it can rise above these challenges, though.
The company boosted sales in six of the last seven years, with 2022 being the rare exception. Revenue declined 2% last year following the prior year's 19% surge. This impressive track record is all due to Garmin's wide product portfolio, paired with its innovation prowess. Owning the stock gives shareholders exposure to several tech category niches ranging from consumer devices like smartwatches to navigation platforms for aviation equipment. That diversity helps protect investors from a downturn in any one area.
Faster earnings growth ahead
Garmin reported weaker profitability in recent quarters, but the long-term outlook is bright on this score. Gross profit margin is consistently high at nearly 60% of sales. And operating income, while down from the pandemic highs of nearly 25% of sales, stabilized and could be ready to rebound. This metric edged up to 21.2% of sales in Q3 from 21% of sales a year earlier.
Investors shouldn't expect a big boost here over the next few quarters, especially if economic growth rates remain sluggish. But slowing inflation is easing those cost challenges that have hampered earnings through most of 2023.
As a result, there's a good chance that Garmin will start moving profit margins back above 20% of sales into fiscal 2024. Combined with the 8% revenue spike that most Wall Street pros are expecting next year, that success could power significantly higher earnings ahead.
The price is right
It is true that much of this good news is being reflected in Garmin's elevated stock valuation. Shares today cost 4.5 times annual sales, up from the price-to-sales ratio of 3.6 that investors could have enjoyed in early 2023. Zoom out, though, and you'll see that shares aren't priced too high from a historical perspective. Investors were paying about 7 times sales at the pandemic's peak, for example.
Sure, Garmin isn't likely to return to anything like the 19% annual sales increase and 25% profit margin that shareholders saw back then. But high mid-single-digit growth is very likely over the next few years, and margins should improve thanks to a steady flow of innovative product releases. If positive momentum holds up, then there's every reason to expect market-beating returns from here, even following the 2023 rally to date.
