The manufacturer of the once-hot navigation devices for automobiles announced that it was purchasing a rival German navigation company, Navigon, for an undisclosed amount. Navigon has downloadable applications in place on Apple's iPhone and Google's Android operating system, which should help generate a new revenue stream for Garmin. But is this really going to be enough to keep Garmin relevant?
The majority of Garmin's revenue is still derived from the highly competitive automotive GPS market. Revenue in this segment showed a year-over-year uptick in its most recent quarterly filing. That result was a surprise to many, including myself, but what came as no surprise was the 91% freefall in operating income. Overall operating margins also fell to 15% from 19%, while gross margins dove 700 basis points to 47%.
It's becoming apparent that with increased competition from Netherlands-based TomTom, and low-priced or free navigation applications being offered on smartphones from Apple, Android, and Research In Motion's
Since 2008, Garmin shareholders have suffered through a painfully slow series of product developments and a contracting revenue stream. Garmin is priced inexpensively compared with its peers, at only 14 times forward earnings, but consider that revenue has fallen for the past two years, and that analysts predict another two-year decline, and you can see why this one may not be done falling.
Garmin has been unable to differentiate to consumers why it's worth dropping potentially more than $100 on its automotive GPS devices when they could just as easily click a few buttons on their phones for free. This mentality has all the makings of slowly killing off Garmin's primary revenue stream and perhaps even choking off the company's only redeeming quality -- its dividend.
What do you think of the direction Garmin is headed? Share your ideas in the comments section below, and consider adding Garmin to your watchlist to keep up on the latest news in the navigation sector.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Google and Apple, as well as creating a bull call spread in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never stops to ask for directions.