Wearables Stocks: What to Watch in 2018

113.2 million wearable devices were shipped worldwide in 2017 according to research firm IDC. That's an 8.5% increase from the 104.3 million devices shipped in 2016. But looking ahead, IDC expects annual shipments to hit 222.3 million in 2021, marking a compound annual growth rate (CAGR) of 18.4% between 2017 and 2021.

2018 should be a transformative year for the market, with first movers fending off new rivals, conflicts erupting in the hardware and software markets, and companies expanding beyond wrist-worn devices. Let's examine these trends to see where the market is headed.

Market share shifts

Fitbit's (NYSE: FIT) share of the global wearables market dropped from 21.9% to 13.7% between the third quarters of 2016 and 2017, according to IDC.

In the low-end market, Fitbit is struggling against cheaper fitness tracker makers like Xiaomi. In the high-end market, it's trying to counter full-featured smartwatches like the Apple (NASDAQ: AAPL) Watch. Yet Xiaomi's share also dipped from 15.2% to 13.7% during the same period.

The clear winners were Apple, which saw its share rise from 7.3% to 10.3%, and Huawei, which grew its share from 2.5% to 6%. Huawei's growth was fueled by its new fitness bands, smart heart rate-tracking earphones, and high-end Android Wear watches.

Garmin (NASDAQ: GRMN), the fifth largest wearables maker in the world, saw its market share slip from 5.4% to 4.9% on softer demand for its fitness trackers and sports performance devices. However, Garmin still occupies unique niches with specialized trackers for swimming, golf, baseball, and other sports. It's also seeing strong demand for its higher-end Fenix Chronos devices, which resemble regular luxury watches instead of digital smartwatches.

Fitbit's misfortunes could continue in 2018 if its new Ionic smartwatch fails to stand out in the increasingly crowded wearables market. Digitimes expects Apple to fare better with an estimated 23-35 million shipments in 2018, up from about 15 million in 2017. Xiaomi should also stay strong as it diversifies beyond the basic Mi Band series with its new Amazfit smartwatch.

Hardware and software battles

As the wearables market expands, supply chain players will battle it out to provide the industry's "best in breed" components. Qualcomm (NASDAQ: QCOM), for example, supplies chipsets for over 80% of all Android Wear devices worldwide, which gives it an edge against Intel's (NASDAQ: INTC) wearable and Internet of Things (IoT) efforts.

STMicroelectronics, which supplies the motion sensors for the Apple Watch and other wearables, should see stronger orders as new devices track more activities. Demand for NXP's NFC (near-field communication) chips will also rise as more wearables add features like mobile payments.

On the software front, ecosystems will expand as Apple keeps watchOS closely tethered to iOS, and Alphabet's Google attempts to do the same with Android Wear and Android. Garmin will keep expanding its Connect IQ app store for its devices, while Fitbit should expand upon the apps it introduced with the Ionic.

Expanding beyond the wrist

Most of today's wearables are wrist-worn devices. But throughout 2018, the market will likely expand to include more smart glasses, smart clothing and accessories, and wearable cameras.

Xiaomi launched connected shoes last year. Intel partnered with Oakley to create augmented reality glasses for athletes, while Google partnered with Levi's to create a connected denim jacket. Google also recently launched its Clips camera to automatically capture everyday moments, as well as its second generation Glass for enterprise users.

Even Amazon is reportedly developing a pair of smart glasses for its Alexa platform which powers its Echo speakers and linked smart home devices. If Apple and Google follow suit, we could see a lot more wearables linking users directly to their connected homes.

The key takeaways

The wearables market is still evolving, but clear winners like Apple are rising to the top, while former market leaders like Fitbit are struggling.

Companies will expand into other wearables categories, while optimized hardware and software will provide them with specialized features which smartphones can't match. Therefore, investors should keep an eye on the wearables market throughout 2018.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Fitbit. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel and NXP Semiconductors. The Motley Fool has a disclosure policy.