GPS maker Garmin (NASDAQ:GRMN) has had a surprisingly solid year: Despite a steadily contracting market for its personal navigators, shares of the company have surged more than 22% in 2014.
Yet Garmin's stock could be poised for a significant correction. There's no guarantee that Garmin's stock will fall -- a market rally could propel Garmin shares even if it's business is contracting -- but the following three scenarios are unlikely to be welcomed by shareholders.
The market for its personal navigators contracts sharply
Garmin has five operating segments. It's largest, by far, is its automotive/mobile segment, which is primarily dominated by the GPS units it sells to consumers and car manufacturers. The rise of GPS-equipped smartphones has put pressure on this business, but has failed to wipe it out entirely.
Last quarter, for example, Garmin's GPS units brought in more than $300 million of revenue, and more than $50 million in operating income (more than 40% and more than 28%, respectively, of the sum total). Both figures are down from the same quarter last year, but not by much -- on an annual basis, revenue contracted less than 5% and operating income less than 2%.
The future of this business is far from bright -- indeed, it seems inevitable that, sooner or later, the market for Garmin's GPS units will vanish almost entirely. But that could take many years, and in the mean time, Garmin's management is buying back stock, paying a steady dividend, and investing in other business segments.
Management expects the decline of this business continue on in a steady, controlled fashion. So far, that appears to be happening, but new technical innovations -- Apple's (NASDAQ:AAPL) CarPlay, for example -- could dramatically accelerate the change and lead to a faster decline than anticipated. No one is expecting growth, but a sharp drop off could send shares plummeting.
The Apple Watch kills Garmin's wearables
At current levels, Garmin's price-to-earnings ratio is around 18. That's not outlandish -- it is in line with the broader market -- but may seem surprisingly rich for a company whose core business is in decline.
That multiple appears to be, almost entirely, a byproduct of Garmin's wearable business, whose growth is outpacing the declines in Garmin's core GPS unit. Last quarter, on an annual basis, revenue for Garmin's fitness wearables grew more than 40%, while operating income posted similarly impressive gains.
But Garmin's wearables, which include both high-end watches and fitness-tracking bands, are about to face their biggest competitor yet: Apple. The Apple Watch, set to debut early next year, will include a bevy of fitness-related features and compete for the precious wrist space of Garmin's wearable customers.
Admittedly, Garmin's gadgets appear to be far more fitness oriented than the Apple Watch, and perhaps more importantly, do not require a paired iPhone to function. They're also offered at a variety of different price points and offer better functionality in some key areas, such as battery life.
But as the iPhone took a toll on the market for digital cameras, the introduction, and steady evolution of Apple's Watch, could eventually wipe out the market for dedicated fitness wearables -- including Garmin's.
Its other segments struggle
Although Garmin's GPS and wearable segments may be the most vital, it has three other units. Collectively, its outdoor, marine, and aviation businesses generate about 40% of Garmin's revenue and almost half of its operating income.
Those business units are growing, though at different paces. Sales of its outdoor and aviation products rose about 20% last quarter on an annual basis, while its marine business saw its sales rise roughly 12%.
Each segment faces unique challenges, but combined are just as important to Garmin's business as its personal navigators. They may not draw as much attention, but if these businesses were to contract, Garmin shareholders could see the value of their shares decline.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.