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When you're in the business of making new and exciting technology products, things can change fast. Before the iPhone came out in 2007, everyone needed a Garmin (NASDAQ: GRMN) GPS device to help them navigate the world. Then, in the blink of an eye, smartphones made them unnecessary.
Just two Christmases ago, GoPro (NASDAQ: GPRO) cameras were flying off of the shelf and the company's stock peaked at about $87 per share. Since then: misery. Following disappointing product releases and increasing competition, the company's stock has lost over 80% of its value.
But which is the better buy today? While there's no way to tell with 100% certainty which stock will be higher five years from now, I think there's an obviously superior choice.
Cash in the bank is a big deal, especially in the industries that GoPro and Garmin toil. Each company is -- to some extent -- heavily reliant on cranking out new products that wow consumers. If one of those products is a flop, it can create tight financial circumstances.
When these companies have cash on hand, it gives them flexibility to endure such periods, and allows them to get creative and take strategic risks. If they, however, are debt-heavy, even one disappointing sales cycle could lead to the outfit filing for bankruptcy.
Here's how GoPro and Garmin stack up in terms of financial fortitude.
Data source: Yahoo! Finance.
As you can see, both companies benefit from the fact that they carry no long-term debt. That lack of debt gave GoPro a little more flexibility in light of its struggles over the past year; interest expenses would have just weighed it down further.
But that doesn't mean it's the winner of this category. While Garmin is admittedly valued at seven times GoPro's market capitalization, Garmin is still the clear winner. With 10 times the cash, and more than enough free cash flow coming in the door, Garmin is in a much stronger position.
Sustainable competitive advantages
If I were forced to make all of my decisions based on a single variable, this would be it. Often called a "moat" in investing circles, a company's sustainable competitive advantages are what separates it from the throngs of competitors. It is the special something that makes a company what it is.
With both companies, the moats are very narrow. While there's no one out there making cameras quite like GoPro's, the barriers to entry aren't very high, and the markets for both virtual reality and drone cameras -- two of GoPro's growth arenas -- are crowded. In addition, as the past year has shown, the action-camera market itself might not be as popular as once believed.
Garmin, on the other hand, has learned the hard way about moats. After the aforementioned drop with the onset of both the Great Recession and the ubiquity of smartphones, the company was forced to diversify itself. While Garmin's foray into fitness devices now accountsfor a quarter of revenue, it also has divisions in outdoor, marine, auto, and aviation GPS devices.
Finally, we have valuation. While this is half-art, half-science, I think we have a clear winner when it comes to this competition.
Data sources: Yahoo! Finance, E*Trade, Nasdaq, and SEC filings. P/E represents figures from non-GAAP earnings. N/A = Not applicable due to negative earnings and free cash flow.
On almost every metric, Garmin is the clear leader. In short, for the time being, GoPro is a mess. It's very difficult to value the stock based on eroding sales and a very uncertain future. While there's a possibility that it could end up being the more profitable stock, Garmin's shares are trading for a reasonable multiple while offering a 4% dividend, which the company has been able to comfortably pay from free cash flow over the past year.
Final call: Garmin
Garmin is a runaway winner. There's certainly a potential future where GoPro stock outperforms Garmin, but that future is far less probable than one where buying Garmin turns out to be the better choice.
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Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.