Slowing revenue growth
Consumer technology company Garmin (GRMN) has outperformed the broader indexes this year and in the recent past. The stock has returned 79.2% in the last three years. Garmin stock has gained 31.6% in the last 12 months and is up 27.7% year-to-date.
In comparison, the SPDR S&P 500 ETF (SPY) has returned 20.5% year-to-date, 11.4% in the last 12 months, and 50.7% in the last five years. The Invesco QQQ ETF (QQQ) has returned 24.4% year-to-date, 11.5% in the last 12 months and 81.6% in the last five years.
So what has driven Garmin’s stock higher since July 2016? Garmin’s revenue in the last two years has risen by just 5.3% annually. This growth is hardly breathtaking. In fact, if you look at Garmin’s five-year stock return, it has grossly underperformed. The stock is up just 35.4% in the last five years, which amounts to a compound annual growth rate of 6.2%.
In the last five years, Garmin’s earnings per share have risen at a CAGR of 5.6%. Now, analysts expect Garmin’s revenue to rise by 5.7% year-over-year to $3.54 billion in 2019, 4.3% to $3.69 billion in 2020, and 4.4% to $3.85 billion in 2021.
Garmin facing competition in the wearable market
Garmin has lost market share in the Worldwide Wearable segment. According to research firm IDC, at the end of 2017, Garmin stood in the fourth position in the Wearable segment with a share of 5.4%. Its shipments fell 0.8% in 2017 compared to overall market growth of 10.3%. Garmin sales have been impacted by the entry of Chinese players such as Xiaomi and Huawei in this space.
By the end of 2018, Garmin was not among the top five players in the Wearable market. In the last year, Xiaomi and Huawei gained significant market share. Xiaomi’s shipments grew 43.3% YoY while Huawei’s shipments grew even higher by 248.5% compared to the overall market growth of 31.4%.
Garmin shares fell after first-quarter results
Garmin announced its first-quarter results on May 1, 2019, and reported sales of $766 million, a rise of 8.0% year-over-year while earnings per share (or EPS) rose 7.0% to $0.71. This was higher than Wall Street’s revenue estimate of $731 million while earnings were in line with estimates. However, weak guidance drove Garmin stock lower. Garmin had forecast sales of $3.5 billion with earnings of $3.70 per share for 2019. Analysts expected sales of $3.53 billion with earnings of $3.75 this year.
In the Fitness vertical, Garmin completed the acquisition of Tacx and expanded its product portfolio to indoor cycling and training. Garmin completely refreshed its Forerunner line of running watches in the quarter. It also introduced a new Garmin connect application and a new menstrual cycle tracking feature. Garmin is struggling to grow sales at a higher rate than the overall market despite launching new products and growing inorganically.
Is Garmin stock overvalued?
Garmin stock is currently trading at a forward PE multiple of 20.6x. While its earnings are expected to rise by 0.8% this year, earnings are estimated to rise by 4.3% in 2020 and at a CAGR of 5.2% in the next five years. The stock looks grossly overvalued considering its earnings growth going forward. Garmin has a dividend yield of 2.6%, which isn’t high enough to excite income investors.
Why is Garmin trading at a PE ratio of 21x when the earnings growth is 0.80x? Garmin’s revenue and earnings growth do not support its valuation. Garmin will need to grow its earnings by at least 18.0% annually to keep investors interested and support its valuation. We had identified this stock as overvalued back in April 2019. Garmin stock had fallen from $86.62 in April to $76.48 in May 2019.
Garmin stock will likely lose significant value if it does not meet Wall Street estimates in the upcoming earnings. The 15 analysts tracking Garmin have a 12-month average price target of $79.20, which is a bit lower than its current price of $79.75. Analysts too are cautious on Garmin as ten of the 15 analysts recommend a “hold” on the stock. Garmin stock has a low price target of $70.0 and a high price target of $89.0.
Garmin’s revenue growth over the next few years will likely be lower than the overall wearable market. The company is struggling to hold its own in a market dominated by Apple and other large players.