Well. That was unpleasant.
Shares of GPS maker Garmin (Nasdaq: GRMN) are down more than 6% this week and plunged as far as 11% on Monday. As Garmin didn't release any news of its own, I think it's safe to say that this sell-off was collateral damage from the much more impressive sell-off at Garmin chip-supplier SiRF Technology (Nasdaq: SIRF).
Several market pundits opined at the time that because Garmin is one of SiRF's top customers, weak demand for SiRF products could mean weak sales (and weak profits) at Garmin.
Meanwhile, here at the Fool, TMFCanuck has been busy poking holes in that logic. Reminding members of Motley Fool Stock Advisor (Garmin is one of our recommendations) that Garmin's low-price Nuvi 200 series GPS, which does not use SiRF technology, is selling well, he argues that what's bad for SiRF might not hurt Garmin at all.
What's more, to the contrary, TMFCanuck suspects that "a drop in SIRFs margins actually portends fairly well for GRMN." That has the ring of logic to it. After all, for those SiRF chips that do go into Garmin products, you'd expect lower prices to hurt the seller's (SiRF's) margins but help the buyer's margins. Lower component costs means lower "cost of goods sold," the line item that subtracts from a manufacturer's revenues to yield gross margin.
Foolish takeaway
In the final analysis, it's hard for an average investor to know precisely what's going on "behind the curtain" at these tech companies. Maybe Garmin's GPSes are becoming commoditized, squeezing margins in the process. Maybe a cash-strapped consumer isn't buying as many GPSes as in years past. We won't know for sure until the earnings (or the earnings warning).
What we do know, is that thanks to the drop, Garmin appears to be a bargain at a forward P/E of around 15. Unless the worst does come to pass, that's cheap for a company with Garmin's future revenue prospects.
