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Better Buy: GoPro, Inc. vs. Garmin

By Dan Caplinger - Mar 29, 2016 at 10:45AM

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Which of these two stocks deserves more of your attention?

Image source: GoPro.

Electronic devices have entered into every facet of our lives, and those who like to take things to the extreme are quite familiar with companies that aim to cater to their dreams. GoPro (GPRO 4.64%) has made a name for itself by providing the cameras extreme-sports enthusiasts routinely use to document their exploits. And although many think of Garmin (GRMN 2.98%) solely as a GPS-navigation provider, its fitness watches pioneered the smartwatch concept by providing critical information to athletes, and it also specializes in applications for the aviation and marine industries.

Investors see potential in both stocks, but they want to know which one is a better buy right now. Let's look at how GoPro and Garmin compare on some key metrics to see which one might be a smarter pick for investors.

Both GoPro and Garmin have seen their share prices lose ground over the past year, but GoPro has truly gotten crushed. The camera-maker's stock is down 73% since March 2016, compared to just a 14% drop for Garmin in that time period.

After such a huge decline, it's natural to think GoPro shares might look like a bargain. But at least based on simple valuation metrics, that isn't the case. Even with the stock down by three-quarters, GoPro still trades at 46 times trailing earnings. That compares unfavorably to the more reasonably priced Garmin, which carries a trailing earnings multiple of 16.

Forward earnings estimates would often provide a more accurate picture, especially given that many regard GoPro as more of a growth stock than Garmin. Yet investors now fear GoPro will lose money in 2016 and 2017, making its forward multiple meaningless. Garmin trades at about 17 times forward earnings, so at least by this simple metric, Garmin gets the nod over GoPro.

When it comes to dividends, there's a clear winner between these two stocks. GoPro doesn't pay a dividend, which is perfectly normal for a company that has just emerged in the public stock markets and is in the middle of its hyper-growth stage. What's important for a company at GoPro's stage is to focus on maximizing profit and plowing that money back into growing its business. As we'll see later, that might not be working perfectly for GoPro right now, but investors shouldn't draw negative conclusions from the fact that GoPro doesn't make dividend payouts.

Garmin stands out as a high-yield dividend stock with its current yield of 5.2%. Some have argued that Garmin's dividend isn't sustainable, and it currently represents about 85% of what Garmin earns. Yet the GPS-maker has regularly increased its dividends over time and now pays eight times what it did a decade ago. Even if Garmin's best growth days are over, its commitment to dividend investors gives it the edge over GoPro on the dividend front.

The key question both GoPro and Garmin face is where their businesses go from here. GoPro suffered a tough holiday season, seeing demand for its key line of action cameras decline. Some see promise in other areas, but GoPro will have to fight rising competition in most of them. For instance, the drone space could give GoPro the opportunity to get its cameras involved in aerial surveillance, but partnerships between major tech companies and other players in the drone space will threaten the ability of the GoPro Karma drone to capture the market share it needs. Meanwhile, investors are bracing for an even uglier current quarter, in which sales could drop by more than half from year-ago levels because of a lack of new camera devices and weaker demand for current offerings. GoPro's decision to discontinue older product lines in order to emphasize its newer products is a calculated gamble, but the company will need success from drones, virtual reality, or other as-yet undiscovered innovations in order to produce the growth investors want.

Garmin's growth prospects are also in doubt, but the challenges are arguably clearer. Sales of dedicated GPS devices have plunged, but personal wearable technology like its fitness watches have held up better than many had expected. In the holiday quarter, sales fell 3%, but that was less than half what investors had feared. The company hopes for flat sales in 2016, with the fitness category producing double-digit percentage growth to offset the waning influence of GPS. Combine that with Garmin's dominance of the specialty navigation arena in marine and aviation applications, and the company at least has a firm grip on what it will have to do to continue growing.

GoPro's small size gives it the ability to turn things around quickly if it can find the right strategy. However, at this point, the camera-maker is still struggling to find its direction. At least for now, Garmin looks like the better buy, both because of its current valuation and dividend payments, and because of its clearer path toward admittedly more modest growth opportunities.

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Stocks Mentioned

Garmin Ltd. Stock Quote
Garmin Ltd.
$105.54 (2.98%) $3.05
GoPro, Inc. Stock Quote
GoPro, Inc.
$6.99 (4.64%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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