The wearables market is still rapidly growing, with research firm IDC expecting shipments to rise from 125.5 million this year to 240.1 million in 2021. However, it's also a highly competitive one, and "pure plays" like Fitbit (NYSE: FIT) and GoPro (NASDAQ: GPRO) have thoroughly disappointed the bulls.
Fitbit and GoPro have respectively fallen 7% and 9% this year, and both stocks trade at roughly a third of their IPO values. But other wearables makers have fared much better. Let's check out three standout performers: Garmin (NASDAQ: GRMN), Apple (NASDAQ: AAPL), and STMicroelectronics (NYSE: STM).
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Garmin is best known for its GPS devices, but it also produces a wide range of fitness trackers and smartwatches, including its Vivofit, Vivoactive, Forerunner, Fenix, and D2 devices. Garmin controlled 4.9% of the global wearables market during the third quarter according to IDC, making it the fifth largest wearables maker in the world.
Fitness-tracking devices accounted for 22% of Garmin's revenue last quarter, but sales have fallen in recent quarters due to tough competition and market saturation. Sales of Garmin's automotive GPS devices, which accounted for 25% of its top line, have also been fading due to the rise of smartphones and in-dash GPS systems.
However, Garmin has been offsetting those declines with double-digit sales growth in its outdoor, aviation, and marine GPS devices -- which also boosted its gross margin. As a result, analysts expect Garmin's revenue and earnings to respectively rise 2% and 3% this year.
Those growth rates aren't exciting, but Garmin also pays a generous 3.3% forward yield. Investors seem to like Garmin's stable growth and dependable income -- that's why the stock rallied nearly 30% this year.
Apple still makes most of its money from the iPhone, but it also controls 10.3% of the global wearables market with the Apple Watch, according to IDC. That makes it the third largest player after Xiaomi and Fitbit, and the second fastest-growing player after Huawei.
Apple doesn't disclose shipment numbers for the Apple Watch, but it claimed in November that sales rose more than 50% annually for three consecutive quarters. That far exceeded the 20% growth which analysts had expected.
Former analyst Gene Munster, now a venture capitalist, estimates that the Apple Watch still only accounts for 3% of Apple's top line -- but that could rise as the Series 3 adds a stand-alone cellular connection and new healthcare features. The Apple Watch's growth should also complement the growth of Apple's Services and Other Products units, which could gradually pivot the company away from the iPhone.
Shares of Apple have rallied nearly 50% this year, but the stock still looks cheap at 14 times next year's earnings and it pays a decent forward yield of 1.5%. Analysts expect its revenue and earnings to respectively rise 20% and 24% this year.
STMicroelectronics, the largest chipmaker in Europe, produces a wide range of analog, digital, and mixed-signal chips for the automotive, mobile, gaming, industrial, healthcare, and Internet of Things (IoT) markets.
It also produces key components for Apple -- including motion sensors for the iPhone and Apple Watch, and a motion-detecting chip in the latest iPhones -- and computer vision chips for Mobileye, the crash avoidance system maker that Intel purchased earlier this year.
However, STMicro also offers 32-bit microcontroller development boards, which are equipped with motion sensors, environmental sensors, and wireless technologies for OEMs to quickly produce smart headphones, fitness trackers, and smartwatches. Therefore, the commoditization of the wearables market represents a great opportunity for STMicro as OEMs rush to launch their own devices.
Shares of STMicro rallied nearly 90% this year, fueled by three straight quarters of double-digit annual sales growth and a broad-based demand for semiconductors across multiple industries. Analysts expect STMicro's revenue to rise 19% this year, and for its earnings to more than triple -- but the stock still trades with a reasonable forward P/E of 17. It also pays a forward yield of 1.1%.
The bottom line
Garmin, Apple, and STMicro aren't "pure play" wearable stocks like Fitbit or GoPro, but they still give investors exposure to the wearables market while offering better-diversified businesses, consistent profits, and reliable dividends. That's why these three stocks outperformed most other wearable stocks -- as well as the S&P 500 -- in 2017.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, and GoPro. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.