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Wearable tech stocks look like a good fit

1 August 2016 in Trading Ideas

Key Takeaways

  • Apple’s Watch may not be the industry savior we thought it would be.
  • That’s OK since old-school companies like Garmin and GoPro reported strong profits recently.
  • Motifs mentioned: Wearable Tech
  • Stocks mentioned: Apple (NASDAQ:AAPL), Garmin (NASDAQ:GRMN), GoPro (NASDAQ:GPRO)

It may be time to admit that the product expected to be the crown jewel of the wearable technology sector may not be living up to expectations. But the industry and its investors are hardly suffering.

The Wearable Tech motif has jumped 15.6 percent in the past month. In that same time frame, the S&P 500 has increased 3.6 percent.

In the past 12 months, the motif has fallen 7.8 percent; the S&P 500 is up 4.5 percent.

Shares of Apple (NASDAQ:AAPL), have certainly helped the cause, rising more than 10 percent in the past month. (Apple’s stock constitutes a more than 16 percent weighting in the motif). But let’s face it – its recent rally has had more to do with pleasing investors with its overall performance than with the growth trajectory of its trying-to-be-ubiquitous Apple Watch.

Earlier this month, the research house IDC said sales of the Apple Watch were down by more than half in the second quarter.1 The company is still moving a lot of watches – it sold an estimated 1.6 million of the devices in the quarter – but it’s worth remembering that this is a company whose top product, the iPhone, showed uninterrupted growth for nine straight years after its launch.

Garmin and GoPro no slouch either
On the other hand, Apple’s problems are certainly no indictment of the wearable tech sector, as evidenced by the recent earnings performances by two of its early entrants.

Shares of Garmin (NASDAQ:GRMN) have jumped by nearly 30 percent in the past month, helped last week by the company’s profit report that showed its move into the fitness wearable category is more than offsetting the decline from its original vehicle GPS business.2

Garmin raised its full-year profit forecast after reporting better-than-expected quarterly revenue and earnings. It now expects 2016 revenue of about $2.9 billion, above its previous expectations of $2.82 billion.

Both its fitness and its outdoor units had double-digit revenue growth while its auto unit experienced a double-digit decline. That’s not necessarily a huge shocker – the nearly complete saturation of smartphones that carry their own GPS has hurt the market for car-specific GPS units in recent years. However, Garmin CEO Cliff Pemble said the auto segment remains a “solid base” for profit.

Investors were pleased, and so were many analysts, including those at JPMorgan and Credit Suisse, who raised their respective price targets on Garmin to $47 and $44. (Garmin shares closed last week above $54).3

The enthusiasm by traders for wearable tech stocks wasn’t limited to Garmin. Shares of GoPro (NASDAQ:GPRO) shot up last week after the company beat analysts’ revenue and earnings expectations and announced it expected to return to profitability in the fourth quarter.4

This is no small thing, given that GoPro’s stock had fallen by more than 90 percent in the last 12 months, after what analysts at Wedbush called “a series of missteps” over the last six quarters. Indeed, even though its top line exceeded Wall Street’s projections, the company’s revenue was still down 47 percent from a year earlier.

Part of investors’ newfound excitement is the company’s second-half product rollout. GoPro will launch its new Hero5 camera, as well as its Karma drone ahead of the holiday season, which analysts say would put the company on track for a rebound, albeit one that has no guarantee of happening.

“We view the risk-reward profile as quite favorable at present with near-term hype about the new products likely winning out over sales questions that will not get answered until closer to the holiday season,” Wedbush analysts wrote.

If consumers respond positively, GoPro and other wearable companies may continue to please investors – regardless of how many Apple Watches are sold.

 

1Tim Bradshaw, “Apple Watch sales fall 55% as consumers mark time on category,” ft.com, July 21, 2016.

2Mamta Badkar and Adam Samson, “Garmin jumps after wearables advance,” ft.com, July 27, 2016.

3Jon C. Ogg, “Top Analyst Upgrades and Downgrades: Ballard Power, Facebook, Garmin, Mondelez, Range Resources, US Steel and More,” 247wallst.com, July 28, 2016, http://247wallst.com/investing/2016/07/28/top-analyst-upgrades-and-downgrades-ballard-power-facebook-garmin-mondelez-range-resources-us-steel-and-more/.

4Caitlin Huston, “GoPro shares soar as analysts say a return to profit is in sight,” marketwatch.com, July 28, 2016, http://www.marketwatch.com/story/gopro-shares-soar-as-analysts-say-a-return-to-profit-is-in-sight-2016-07-28?siteid=yhoof2.

 

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