GPS Devices Take a Back Seat

Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Smartphones have become an everyday device. They allow access to millions of applications, and have, in essence, become mini computers. Obviously, cell phone manufacturers and technology companies love this, but there is at least one company that despises it.

Garmin (NASDAQ: GRMN) is a household name that used to be a leader in GPS technology. Their fourth quarter results were very unimpressive, and led to a huge decline in their stock. In fact, the company's stock just hit a 52-week low after falling nearly 9.5% on Wednesday. Total revenues fell 16% from the fourth quarter a year ago, and there was not a single geographical region that increased revenues.  In the United States alone revenues fell to $445 million, a decrease of 17%. Garmin's Earnings Per Share (EPS) fell 22% to $0.66 from $0.85. Gross margins actually increased by 1% from 48% to 49%.

Even with the fourth quarter being very disappointing, the year as a whole was not as shabby. EPS rose 3%, gross margins increased 4%, and total annual revenues decreased by 2% or roughly $40 million. Despite the marine segment of Garmin's business being the only revenue decrease besides automotive/mobile, I don't see this starting a trend. The outdoor, fitness, and aviation segments all increased 11%, 8%, and 2% respectively, while marine and automotive/mobile decreased 6% each.  

Things might not be looking great for Garmin, but why? One of the biggest reasons is the ability for people to use GPS directly from their phones. Garmin's primary product has basically become a feature on a phone which was not the case just a few years ago. I would expect the aviation and marine segments of their business to grow because most people flying planes and driving boats don't want to use "Google Maps" to navigate. These segments will keep Garmin afloat, though the company probably won't thrive. 

With 54% of Apple's (NASDAQ: AAPL) revenues being acquired through their iPhones, this is one reason Garmin might be struggling. This means approximately $84.5 billion was generated by iPhones in 2012. The company shows more confidence in its stock with 64% institutional ownership, as opposed to just 46% by Garmin. Apple's EPS have risen nearly 60% in the past year, and have increased annually for more than a decade. Apple's gross margins have increased an impressive 8.4% in the past year, along with an 11.4% increase in net margins. 

I'm not saying Apple is the only company creating struggles for Garmin, after all even Apple had issues with its GPS feature just a few months ago. Despite these struggles, the iPhone has still managed to capture over 50% of the United States smartphone market share. Google (NASDAQ: GOOG) has captured approximately 75% of the market share worldwide, which means iOS and Android devices account for approximately 91% of cell phones currently in use. These devices have GPS capabilities that create substantial competition for Garmin. 

Google's market share is 61% of Apple's, but the company has 4% more institutional ownership than the iPhone developer. Yes, Google derives most of its revenues from ads, but still managed a 32.4% increase in revenues from a year ago.  Surprisingly, Google's gross margins fell from 65.2% to 58.9%, but are 15% better than Apples and 9.9% better than Garmin's. Google's EPS fell over 10% in 2012, while its net margins fell over 20%. 

The Foolish Bottom Line...

With smartphones playing such a huge role in people's everyday lives, I would be cautious of companies like Garmin. Yes, I expect them to stay afloat, but will likely struggle in areas outside of their aviation and marine segments. Apple and Google have both performed well and I expect them to grow even more. I would recommend to stay away from Garmin at the moment, as it struggles to figure out its competitive advantage.  


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