Google, Apple Entering The Automotive Market: A Real Threat For Garmin?

Jan. 1.14 | About: Garmin Ltd. (GRMN)

I wrote this article about Garmin (NASDAQ:GRMN) on November 21, 2013. In my article, I concluded that Garmin has a 45%+ upside potential. I based my conclusion on the assumption that Garmin's revenue will be flat over the next five years and that Garmin will be able to shift their revenue from the low profitable automotive segment to the more profitable fitness and outdoor segments. I calculated that Garmin's operating income should increase at least 45% over the next five years and that the share repurchases will support the company's earnings per share even further.

However, a recent article made me more cautious regarding Garmin's 45%+ upside potential. I read this article in the Wall Street Journal on Monday December 30, 2013. The article describes that Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) both expanded their business into the automotive market. Both companies are looking for manufacturing partners in the sector to establish their technology into the vehicles. It is expected that Google and Audi (OTCPK:AUDVF) will announce a partnership at the Consumer Electronics Show in Las Vegas next week, according to the Wall Street Journal. Apple already made several deals with car manufacturers, including partnerships with Daimler (OTCPK:DDAIF) and Honda Motor (NYSE:HMC).

This development is bad news for Garmin, because both Google and Apple offer navigation and location services. Garmin's navigation service will become useless to some extent, in case that the car manufacturers decide to use the Android or iOS technology. Both operating systems are superior to the Garmin's navigation devices, because both systems enable drivers to access the apps available on Android or iOS smartphones in their car. Therefore, it is likely that Garmin will lose a part of their market share in the automotive segment to Apple and Google.

In my previous article, I made the following assumption regarding Garmin's automotive sales:

The automotive and mobile sales are expected to decrease by 7.5% per year. The assumption is based on the fact that the total PND market will decrease from 33 million in 2011 to 17 million in 2017 (see this article), or an average annual decline of 9.5% per year. On the other hand, Garmin has several agreements with car manufacturers (like Mercedes-Benz), which will moderate the impact of the annual decline.

Now, Google and Apple could become a real threat to Garmin if the integration of their operating systems into the vehicles is successful. In that case, Garmin's automotive sales will decrease faster than I initially expected. As a result, Garmin's future earnings per share will also be lower than I expected and the calculated 45%+ upside potential is too optimistic. Therefore, I recalculated my estimate for Garmin's earnings per share in 2018.

In my previous calculation, I assumed that Garmin's average automotive sales will decrease by 7.5% per year, compared to an average annual decline of 9.5% for the total PND market. Now, I expect that Garmin's average automotive sales will decrease 9.5% per year instead of 7.5%. The additional 2% decrease in Garmin's annual automotive sales will lower Garmin's upside potential to 40% (all the other variables equal to my previous article).

So, the fact that Google and Apple entered the automotive segment does not make a difference for my bullish outlook for Garmin. Garmin remains an interesting investment at its current price of $46 a share. Also, the company provides investors with a nice dividend (yield: 3.9%). However, it is possible that Apple, Google or another major company will make a play for Garmin's more profitable market segments, such as the fitness segment. Such a development could have a significant impact on my calculations and Garmin's upside potential.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.