Apple: Garmin In The Crosshairs (NASDAQ:AAPL)

Overview

Apple Inc. (NASDAQ:AAPL), probably the most iconic company in the world, has been a serial acquirer of businesses over the past 5 or 6 years. On average, Apple acquired a new company every four weeks, with the majority of acquisitions being unrecognizable brands valued in the tens or hundreds of millions. One of Apple’s largest acquisitions in the past decade was Beats Electronics, the headphone maker founded by rapper and producer Dr. Dre, for $3 billion. Other than that, Apple typically acquires smaller companies for their technology and talent, then incorporates said technology into its own products.

With the growing popularity of the Apple Watch among iPhone users and the improvements Apple has made targeting fitness and outdoor, I have to wonder if Garmin Ltd. (GRMN), another leader in GPS-enabled watches, may be an acquisition target. As someone who enjoys fitness and the outdoors and is a long-time Garmin user, it feels like a natural fit. With a current market cap just under $16 billion (watches are around 60% of the business or $9.6 billion), it’d be one of Apple’s largest acquisitions. With Garmin down nearly 40% in 2022, now may be an opportune time for Apple to acquire another leader in the smartwatch space and bring a top fitness app, Garmin Connect, under its own umbrella of products. The acquisition would be immediately accretive to Apple, adding nearly $3 billion to the top line and $900 million to the bottom line annually.

If not an acquisition target of Apple, I’m a little skeptical on the long-term prospects of Garmin. Apple Watch continues to gain in popularity among iPhone users and, with Apple now targeting the fitness and outdoor community, I think investors have reason to be cautious on Garmin. For Garmin, is it reason to become excited or fearful? Time will tell.

Targeted Advertising

As a runner, I’ve been a satisfied user of Garmin’s products for the past 10 years, having owned the Forerunner 110 series watch (twice) and, most recently, the Forerunner 245 Music (currently on my wrist). I’ve also been a shareholder of Garmin in the past and believe it to be a sound business with strong fundamentals and cashflow, but I think growth is waning a bit, so I’m currently not a shareholder.

Previously, I had considered and dismissed the threat that Apple Watch posed to Garmin. This is because Apple didn’t appear to be making a concerted effort catering to fitness and outdoor enthusiasts. Or at least I was never on the receiving end of such advertisements. However, on a trip to Destin, Florida, last week, I saw this commercial and it changed my mind.

With a targeted eye on the fitness segment, incredibly deep pockets and technological capabilities, I wonder if Garmin should be afraid or excited. I have to believe if Apple decided it wanted to become the smartwatch leader in the GPS-enabled fitness tracking space, it’s theirs for the taking.

Garmin Has A Better Fitness Platform

One reason I think Apple should consider an acquisition of Garmin is for the platform itself, Garmin Connect. I’ve read a lot of reviews from customers using Apple Watch for fitness tracking, and Apple’s Health app is subpar compared to Garmin Connect. It’s possible to connect Apple Watch to other fitness apps such as Runkeeper, MyFitnessPal, and even Garmin Connect, but having a top-tier platform seems like low-hanging fruit for Apple. I think Apple could attract a lot of new users, including myself, to the Apple Watch by having a first class fitness tracking app. Perhaps Garmin is a “buy it, don’t build it” option for Apple.

Note – Apple Watch does not sync seamlessly with Garmin Connect (i.e., it’s not one of the options to select when trying to pair devices), but there is a workaround from what I’ve read, though I’ve not tried it personally.

Customer Conversion

Personally, I’ve been considering switching to an Apple Watch as a fitness tracker because the watch offers a lot of features my Garmin watch doesn’t, such as sending text messages, having phone conversations, playing music via speaker, etc… Now, Garmin does have watches that offer extra features and cellular service, but those features are limited (and expensive) and cellular coverage is mainly used for emergency tracking and location services only, not routine/casual usage.

However, the primary factor preventing me from switching to Apple Watch is Garmin Connect because it’s just a good product. It syncs seamlessly with my watch, offers a ton of data and analytics, and has a good online community. Obviously, if Apple were to acquire Garmin the customers come with it, but if Apple were to develop a similar top tier fitness app, I think a ton of existing Garmin customers would convert. I’m probably one of them, and I bet there are a lot of others sitting on the fence just like me.

What’s The Opportunity?

This article is from 2020, but it states Garmin has somewhere around 20 million watches in use while Apple has sold 50+ million watches since debuting Apple Watch in 2015. If Apple were to acquire and/or convert those 20 million Garmin users into Apple Watch users, that’s a 40% increase in customers. Not too shabby.

Garmin reports earnings in five segments: Fitness, Outdoor, Auto, Aviation, and Marine. Garmin watches are reported under Fitness and Outdoor, which made up 57% of total revenue in 2021. Total revenue in Fitness and Outdoor amounted to $2.8 billion in 2021, while operating income came in at $854 million.

There are two ways to look at this opportunity if you’re Apple: as an acquirer or a converter.

Acquirer

If Apple were to acquire Garmin, you can view the above numbers as immediately accretive to Apple’s top and bottom lines. You may also assume that, via acquisition, Apple isn’t necessarily looking to convert existing Garmin users to Apple Watch. To me, Apple acquiring Garmin shows they’re more interested in minimizing competition than converting users to Apple Watch. Not that Apple couldn’t choose to convert Garmin users to Apple Watch, but why spend the time doing so if you’ve just bought out the competition?

From an acquirer’s perspective, Apple would benefit from an approximate add of $3 billion to the top line and $900 million to the bottom line. Since Apple Watch revenue is somewhere around $12 to $15 billion annually, acquiring Garmin would immediately increase sales by +20%.

Again, Fitness and Outdoor represent around 60% of Garmin’s business, so Apple could acquire only this specific portion or make a bid for the entire company. Assuming Garmin was agreeable to selling only the Fitness and Outdoor segments, 3x sales or $9 billion seems like a steal with a 30% operating margin ($854 million / $2.8 billion). The business would likely pay for itself within 5 to 7 years.

Converter

If Apple were to cannibalize Garmin’s sales without acquiring the business, the opportunity seems like it’d offer higher revenue and profit. This is because the average price point of the Apple Watch is higher than Garmin’s and because operating margins are likely similar at +30%.

If I assume Apple were to convert 80% of Garmin’s 20 million users to Apple Watch and that the average watch price is $500, this represents $8 billion in revenue and $2.4 billion in operating income. However, I have a hard time believing Apple can convert so many customers in a short period of time. It’s more likely customer conversions are annualized slowly over time versus a straight up acquisition. The higher sales and earnings from cannibalizing sales is less attractive when you look at it from this perspective.

Personally, I’m not a fan of the idea Apple may put Garmin out of business or substantially hinder sales and revenue, but one can’t rule it out.

Bottom Line

Apple and Garmin are leaders and competitors in the smartwatch industry and, with Apple having a long history of acquisitions, one can’t help but wonder if Garmin might be in their crosshairs. Apple offers a superior product in the Apple Watch, but Garmin offers a superior product with Garmin Connect. A merging of the two seems like a natural fit and would likely result in a lot of Garmin watch users switching to Apple Watch.

Assuming an acquisition isn’t in the cards, Garmin investors should consider the impact of Apple on Garmin’s business long-term. With Apple now targeting fitness and outdoor enthusiasts, I’d be worried their deep pockets and technological expertise will cannibalize Garmin’s sales and earnings over time.

Whether Apple is interested in such an acquisition is anyone’s guess, but I hope readers enjoyed exploring the idea about Garmin.