Garmin (GRMN) recently soared 17% in a single day following expressive earnings and revenue numbers, with a 4% revenue growth rate ahead of market expectations helping the company’s EPS beat by 22 cents at $1. The new earnings and stock jump brought GRMN shares toa. 23.7 forward P/E ratio.
If you’re old enough to remember a pre-smartphone world, this may seem pretty strange. Garmin was once a company famous for in-car GPS products whose primary product and future growth potential was struck dead by the explosion of smartphones first from Apple (AAPL) and then from Google (GOOG, GOOGL)’s Android platform. With a GPS device in a portable device that works well in and out of cars, Garmin’s main product was suddenly obsolete.
Many investors responded by selling the company off in late 2007, a fully year before the 2008 crash would hit the entire market. That 2007 sell-off was fundamentals driven, as the recently released iPhone spelled the end of in-dash GPS. And while GRMN is still off its all-time-high, it’s also up over 3x from its 2009 low. What can explain that price growth, and how could an investor have taken advantage of the opportunity to buy GRMN at the time?
To answer these questions, we would need to assess two things: firstly, Garmin’s product roadmap and strategy to pivot to b2b sales and wearables, which it has consistently done over the last decade. Secondly, we would need to assess changes in the market which allowed new product categories to open up that GRMN could tap into for new sources of revenue.
In both cases, Garmin has proven its ability to pivot. Its recent revenue growth was attributable in part to its marine chartplotters, its GPS smartwatch, and a wearable dive computer product. Those are just the company’s new products; its established products saw double-digit growth across the board in FY2018, with one obvious exception: auto.
Garmin conveniently breaks out its products into four categories, including aviation, marine, outdoor, and fitness. Auto fell 19% year-over-year in 2018, and more declines are likely to come. But since auto is a quarter of GRMN’s total revenues, and revenues in outdoor and fitness are up 15% on average, and both are larger than auto, GRMN has clearly demonstrated it is in the process of pivoting to new revenue sources quite successfully.
To understand if a company can pivot, one must throw out the modeling techniques analysts otherwise depend on and go a bit deeper to understand changes in the market and the company’s product pipeline. These are essential components to discovering value, especially deep value in companies whom other investors have given up on. And Garmin is a great case study in the need to understand the pivot.