Market Cannibalization And Regulatory Burdens Will Weaken Wearable Profitability

Key Takeaways

• Widespread smartphone adoption and rising competition threaten Garmin's device sales, weakening growth prospects and eroding pricing power in core markets.
  
• Stricter regulations and reliance on volatile niche sectors increase operating costs and expose revenue streams to greater risk and unpredictability.
  
• Expansion in health, outdoor, aviation, and subscription services, driven by innovation and integration, will diversify revenue, support margins, and strengthen long-term earnings stability.

Catalysts

Designs, develops, manufactures, markets, and distributes a range of wireless devices worldwide.

• The accelerating integration of health and fitness tracking features, navigation, and AI into mainstream smartphones and multipurpose devices is making dedicated Garmin products increasingly redundant, which could severely dampen future revenue growth as hardware sales are cannibalized across both consumer and professional segments.
  
• As consumers continue to shift spending toward digital services and experiences rather than physical hardware, discretionary purchases of high-end wearables, fitness trackers, and navigation devices may stagnate or decline, undermining long-term top-line growth and constraining the company's ability to drive recurring revenue from new users.
  
• Increased regulatory pressures related to privacy and data security for connected devices-especially in Europe and North America-could force Garmin to divert significant resources to compliance initiatives, sharply increasing operating expenses and squeezing operating margins over the next several years.
  
• Growing commoditization and rapid obsolescence in the wearables and navigation device sector, paired with intensified competition from both low-cost Asian manufacturers and major tech platforms, threatens to erode Garmin's pricing power and compress gross and net margins, diminishing the company's ability to maintain its record profitability.
  
• Garmin's heavy reliance on niche commercial verticals such as aviation and marine, both of which are exposed to cyclical downturns, regulatory headwinds, and geopolitical risk, creates growing revenue concentration risk that could lead to heightened revenue volatility and unexpected long-term earnings declines if these sectors face disruption.

Garmin Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Garmin compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Garmin's revenue will grow by 7.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 23.2% today to 21.4% in 3 years time.
• The bearish analysts expect earnings to reach $1.8 billion (and earnings per share of $9.25) by about August 2028, up from $1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, down from 28.2x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Garmin Future Earnings Per Share Growth

Risks

• Accelerating demand for advanced health and wellness technologies, new product launches like the Forerunner 570 and 970, and proprietary platforms such as Garmin Coach and Connect Plus position the company to benefit from long-term growth in the global fitness and health tracking markets, supporting revenue growth and robust margins over time.
  
• Demographic trends toward an aging but increasingly active population, combined with Garmin's innovation in outdoor and adventure wearables-including the launch of new products like the Instinct 3 Tactical and fenix 8-expand the addressable user base and provide sustained opportunities for recurring sales, which should underpin stable or improving top-line results.
  
• Continued expansion and leadership in aviation and marine segments, evidenced by new integrated flight deck products, certification of the Garmin Autoland system, and strong OEM relationships, diversify revenue streams and improve margin stability, mitigating concentration risks and supporting earnings growth.
  
• Vertical integration and ongoing R&D investment have allowed Garmin to maintain industry-leading gross margins and consistent innovation, suggesting potential for future competitive differentiation and cost control, which may preserve or enhance operating profits.
  
• Growth in recurring subscription-based services, particularly in outdoor, fitness, and aviation, is increasing the proportion of stable, high-margin earnings streams, which could improve earnings quality and reduce the company's reliance on cyclical hardware sales, bolstering bottom-line resilience.

Valuation

• The assumed bearish price target for Garmin is $167.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Garmin's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $285.0, and the most bearish reporting a price target of just $167.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.3 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of $230.15, the bearish analyst price target of $167.0 is 37.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.