Shares of Garmin (NASDAQ:GRMN) have performed well this year, rising nearly 17% in 2014. A string of better-than-expected earnings reports, combined with strong guidance, has propelled shares of the GPS maker to the upside.
But is Garmin poised for a fall?
Below are three reasons why Garmin shares could tumble. It's important to note, however, that even if all three scenarios come to pass, Garmin shares may not decline. A general rally in the broader market, unexpected good fortune, or pure random chance could cause shares to rise. Nevertheless, Garmin investors should hope the company avoids all three possibilities.
1. iOS and Android take over the car
Garmin's personal and automotive navigation systems still comprise the bulk of its business. Last quarter, sales of these devices accounted for nearly half of Garmin's net sales and around 38% of its gross profit. A loss of this business unit, then, would be devastating to Garmin.
And that could happen if new initiatives from Apple (NASDAQ:AAPL) and Google prove successful. In recent months, the two tech titans have announced plans to expand their respective mobile ecosystems to the automobile, replacing the center console's display with a projection of the owners' smartphone.
An iPhone, when docked to a CarPlay-equipped automobile, can easily provide the entertainment and navigation needs of the owner. Apple's maps are already freely accessible to iPhone owners, but become easier to use in the car when beamed to the center console with CarPlay. Android Auto -- when paired with an Android phone -- promises something quite similar.
Given that the vast majority of American adults own a smartphone, it's difficult to imagine that Garmin's GPS business has a long life ahead of it.
2. Its wearables fall out of favor
Of course, automotive and personal GPS units aren't Garmin's only business -- the company plays in several other markets, including wearable technology. Garmin's Forerunner watches are aimed at fitness enthusiasts, and offer owners -- among other things -- the ability to track their heart rate, distance traveled, and average speed. They've proven to be quite popular in recent months -- last quarter, for example, Garmin's fitness category saw annual net sales growth of nearly 80%.
But, like its GPS units, the demand for Garmin's watches could be extinguished by the continued growth of mobile ecosystems. The latest trend in particular -- smartwatches -- is an obvious challenge to Garmin's fitness category. Apple is widely believed to be working on a smartwatch of its own, one that could include a number of fitness-orientated features that would appeal to owners of Garmin's Forerunners. Apple could announce its watch as early as next week, if recent rumors prove true.
Even if Apple doesn't challenge Garmin in this category, many other hardware manufacturers are entering it aggressively, including Samsung. Earlier this year, the Korean tech giant released the Gear Fit -- a wearable, water-resistant band, that tracks the user's heart rate and steps taken.
3. It cuts its dividend
Perhaps as a byproduct of the other two, Garmin shares could tumble if the company cuts its dividend. Currently, Garmin is offering investors a solid yield -- around 3.50% -- making Garmin shares a fairly attractive value play, and somewhat offsetting the concerns surrounding the long-term viability of its business.
If Garmin cuts its dividend -- perhaps because its broader business is deteriorating -- shares could experience a tremendous decline, as investors who may have held the stock for income generation purposes are driven to sell their shares.
Garmin appears challenged
Garmin has other segments -- like marine and aviation -- that do not appear particularly challenged. However, with its GPS units and fitness bands collectively generating almost two-thirds of Garmin's net sales and operating income, the long-term viability of Garmin's business remains in doubt.
General trends in the mobile computing space, led by Apple, could devastate Garmin shares in the coming quarters. Investors in Garmin should hope the company can remain resilient in the face of these challenges.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.