- 2024-09-27
- News
Niche Stocks with High Growth Potential
From the twists and turns in Garmin's growth, it can be observed that experiential consumption is on the rise. Companies that excel in consumer experience, not only understand the real needs of consumers but also possess robust technology to address their demands, and have the capability to vertically integrate supply chains to ensure quality, will have a greater chance of becoming the new growth stocks in the domestic consumer market.
Garmin, a company with high recognition among professionals who are passionate about outdoor activities, was established in 1989 and went public at the end of 2000. Due to its headquarters in Switzerland, it is not highly recognized in the capital market. This article will introduce Garmin's winding growth path and draw lessons from it to predict future consumer trends in China, especially in leisure and outdoor consumption.
In 1989, Garmin was founded by two engineers, Gary Burrell and Min Kao. Initially named ProNav, it focused on developing Global Positioning System (GPS) devices. Today, its product matrix spans automotive navigation, avionics, marine electronics, outdoor and fitness equipment, handheld GPS devices, and more: continuously pursuing new technologies and overcoming various challenges, providing communication navigation electronic cockpit systems for aircraft, communication navigation, radar, sonar, and autopilot systems for ships, navigation and media entertainment systems for vehicles, and GPS handheld mapping and navigation systems for industry users. Since the first GPS sports watch was introduced in 2003, Garmin has accumulated over 20 years of industry R&D experience, constantly pushing the limits in technology and manufacturing processes, and surpassing itself. Over the past 30 years, Garmin has shipped over 200 million GPS devices globally, accumulated over 60 million active sports users worldwide, and achieved the highest market share in outdoor wearable products globally.
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Deepening professional technology and segment barriers
In 1960, the United States launched its first navigation satellite "Transit," marking the first step in global satellite positioning; the U.S. Department of Defense divided the entire satellite positioning into three phased plans, at that time, it was the first phase, with only concepts, and the company where Min Kao worked took on some projects; in 2000, the United States lifted the interference on civilian GPS, reducing the original 100-meter error to below 10 meters, and GPS entered the mass era.
Garmin's two founders saw a great opportunity for GPS to transition from military to civilian use, but their old company did not care much about GPS technology, so they decided to start their own business, manufacturing equipment for the emerging global positioning system. At that time, "sky maps" were only in the hands of the military, and the company used one year to establish its own positioning database. Automotive navigation business: In 1990, Garmin entered the automotive market, developing automotive navigation devices. In 2001, it launched its first automotive GPS device integrating maps, navigation, and entertainment functions. Later, the product matrix gradually became complete, including personal navigation devices for vehicles (PND), driving recorders, in-vehicle infotainment systems, advanced driver-assistance systems (ADAS), etc. By 2008, Garmin held nearly one-third of the portable navigation device market share, mainly devices installed on car dashboards, accounting for about 72% of the company's sales, becoming the company's largest niche market.
Avionics equipment: In 2003, Garmin began to further provide high-performance avionics, including avionics systems, flight instruments, and navigation equipment, widely used in commercial aviation, general aviation, and military aviation fields. According to the company's announcement, there are currently about 230,000 civil aircraft worldwide, more than 90% of which use Garmin flight systems. Auto Land is a revolutionary product of Garmin; in emergencies, if pilots encounter problems, the aircraft can take over and land safely independently through their engineering systems; additionally, there is a feature on the watch that, once the cabin altitude reaches a set critical value, it will immediately issue a warning, reminding pilots to replenish oxygen quickly.
Outdoor fitness business: In 2003, Garmin entered the outdoor and fitness equipment sector, and the first wearable GPS was born. An engineer who loves running had a sudden idea during a test to tie the GPS eTrex to his wrist and unexpectedly found that the display of distance and speed was quite good, leading to the creation of a portable GPS as a running training device, thus giving birth to Forerunner 201, also the first intelligent wearable device.
In 2008, Garmin continued to refine and deepen its outdoor and fitness business, launching a series of wearable GPS devices for vertical sports types, gradually integrating more sensors, providing more advanced training and data monitoring capabilities, and also expanding in product form, such as the release of a smart cycling platform in 2024.
Dealing with crises
In 2008, Google launched the Google Maps application for the Android operating system. In 2012, the Google Maps application was first launched on Apple's App Store for use on iOS devices. Drivers can simply use their phones to find their way instead of looking for a dedicated device. In 2012, Garmin's automotive and mobile product sales decreased by 40%, and 18 months after the launch of Google Maps navigation, the market value of the entire standalone GPS device manufacturers evaporated by 85%.
Garmin's response was to continue to delve into the diversified markets it had already opened up. For 30 years, the company has been committed to the development of GPS navigation and wireless device applications, continuously launching innovative products. At that time, Garmin was involved in five major markets, including automotive, aviation, marine, outdoor, and fitness. Among them, "outdoor" and "fitness" are the fields where wearable devices can play a role. As early as 2005, they were laid out as two product lines, gradually taking over to become Garmin's most important revenue items. According to the company's Q3 2024 financial report, fitness business revenue accounts for 29%, outdoor business 33%, marine business 14%, aerospace business 13%, and automotive business 11%.
For the automotive business, the company did not give up. Garmin transformed in-vehicle navigation through a new hybrid navigation solution, which improved performance and accuracy through cloud-based maps, routes, and integrated interconnectivity services. The application of this technology not only enhanced the user experience but also provided Garmin with a new competitive advantage in the in-vehicle navigation market. At the same time, it provided a highly integrated driving experience for the smart cockpit ecosystem and deeply rooted the concept of health into automotive intelligent systems and travel scenarios, achieving intelligent interconnection between wearable devices and vehicles, such as contactless one-click opening through NFC door lock functions and smartwatches. Finally, it focused on the growing aftermarket market for off-road and other areas.
Garmin has always maintained a sense of crisis, researching and laying out early, from initially developing 4-5 new products a year, it has now advanced to maintaining nearly a hundred product plans a year. Therefore, in terms of operations, the company is 100% conservative and steady, advocating that cash is king and insisting on retaining a large amount of cash. Min Kao emphasized that whether the company earns more or less is one thing, but more importantly, financial health is crucial. Since its listing, Garmin has never had interest-bearing debt. The Q3 2024 financial report shows that the company's cash and cash equivalents on hand reached $2.4 billion.
In terms of operations, Garmin practices deep vertical integration, including R&D design, production, marketing, warehousing, distribution channels, customer service, repair support, and other processes are all controlled by Garmin itself, optimizing each link's efficiency, product quality, and service level. Looking at the Q3 2024 financial report, Garmin's overall gross margin is 60%, up 3% year-on-year; the operating profit margin is 27.6%, up 6.4% year-on-year. The gross margin for the first three quarters is 58.5%, up 1.3% year-on-year; the operating profit margin is 24.1%, up 4% year-on-year. The net profit for the third quarter alone is $400 million, a year-on-year increase of 55%; the net profit for the first three quarters is $980 million, a year-on-year increase of 31%.
The arrival of outdoor experiential consumption
Loving the outdoors, which combines stress relief and social interaction, as well as the pursuit of self and exploration of nature, is an inherent need that has existed since humans were in the hunting-gathering period. Whether looking back at the past or looking forward to the future, Europe and America are undoubtedly the strongholds of outdoor sports. According to data published by Statista, it is expected that the global outdoor sports goods market will reach $236.3 billion by 2025, with the European and American market size being $122.9 billion, accounting for as much as 52%.
Currently, running, fishing, hiking, cycling, and camping are the top five outdoor sports most popular among American residents. From the 1920s to the 1970s, economic growth, road construction, and motorization, as well as the improvement of infrastructure, drove the explosion of the American camping industry, with the number of camping families growing from 3 million in 1960 to 17.5 million in 1978.
In the 1940s, the U.S. government legislated an 8-hour work system and a paid vacation system, and with the increase in residents' leisure time and the further improvement of the national consumption level, outdoor sports that require higher spending and strong professionalism, such as skiing and kayaking, began to become popular.
Between 1994 and 2001, the growth rate of outdoor sports exceeded 100%, and by the early 21st century, the participation rate in American outdoor adventure sports reached as high as 56%. Entering the 21st century, the outdoor sports industry entered a mature stage, and the arrival of the COVID-19 pandemic has further catalyzed the popularity of outdoor sports. According to public data from the Outdoor Industry Association, the participation rate in American outdoor sports has been stable at around 48% since 2006.
After the outbreak of COVID-19, due to the limitations on indoor activities, the number of people participating in outdoor sports in the United States surged from 154 million in 2019 to 164 million in 2021, and the participation rate increased from 50.7% to 54%. Outdoor sports have become a mature industry in the United States with a steady increase in participation and scale.
Looking back at the development process of American outdoor sports, it is inseparable from the continuous development of the economy and society, as well as the continuous progress in people's ideological concepts and health awareness. Currently, with the continuous investment in large-scale infrastructure construction in China and the continuous improvement of labor, vacation, and social welfare security mechanisms, outdoor sports have attracted a large number of enthusiasts with their unique charm under the wave of national fitness.
Gudong App data shows that the number of people participating in outdoor sports in the first half of 2024 increased by 19% year-on-year. Among them, the number of outdoor cycling users increased by as much as 38.7%. Mob Research Institute data shows that post-90s have the highest proportion in outdoor running and outdoor cycling users, while post-80s are the main group for outdoor walking. At the same time, the number of post-00s cyclists is growing rapidly. Nearly 90% of respondents engage in outdoor sports every month, with the highest number of people exercising 3 to 6 hours per week, making outdoor sports a new lifestyle for more and more people.
It is estimated that by 2025, the market size of China's outdoor goods industry will increase to 240 billion yuan. Tmall shared at the 2024 Beijing ISPO exhibition (International Sporting Goods Trade Fair) that China's outdoor industry has entered a vertical and mass development stage. According to the latest analysis by Statista, the demand for global smart wearable wristbands in the digital health market will continue to increase in 2024, and the Chinese market is expected to generate the most revenue for the global smart wearable market in 2024, with an estimated scale of $18.95 billion.
From 2021 to 2023, Garmin's data for cycling and hiking activities in China increased by more than 30%. At the same time, Garmin provides professional electronic devices for an increasing number of people who love outdoor sports worldwide, offering positioning, safety, monitoring, and interaction functions, and its sports watches have become a major single product with annual sales of $5 billion. From the third quarter of 2023 to the third quarter of 2024, Garmin's revenue growth rates were 12%, 13.5%, 20.4%, 14%, and 24%, showing an accelerating trend starting in 2024, reflecting the new contribution of the outdoor craze and the expansion of the crowd to the company's performance.
In the past, there were Lululemon, Columbia, and The North Face, and now there are On Running, Deck, Garmin, etc., which have been deeply cultivating professional and segmented products. However, as the professional and passionate crowd expands and spreads from niche to mass, they often have the potential to be growth stocks. In the Chinese market, although Garmin faces fierce competition, including brands like Apple, Huawei, and Xiaomi, in response to the competition, Garmin prioritizes defending its base, "sea, land, and air" is a key phrase that Garmin is currently spreading in the Chinese market, representing Garmin's foundation - GPS technology. While wearable devices like Apple and Xiaomi have not yet shaken off the label of being accessories to mobile phones, Garmin wins with more professional functions (long battery life, accurate positioning, better interaction), etc.
After more than 40 years of development since the reform and opening up, the first wave of material consumption in Chinese society has been perfected, giving birth to many well-known brands such as Yili, Haidilao, and Lenovo. After the basic material life is satisfied, experiential consumption is on the rise. However, it is much more difficult for companies to do a good job in consumer experience, not only needing to understand the real needs of consumers but also needing to have robust technology to solve consumer demands, while also having the ability to vertically integrate supply chains to ensure quality. New consumer brands that meet these points will have a greater hope of becoming the new growth stocks in the domestic consumer market in the future.
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