Somewhere, comic book creator Chester Gould is smiling.

Though he passed away in 1985, he'd be thrilled to know that the smartwatch he created back in the 1940s for his most famous character, Dick Tracy, would finally land on consumers' wrists in 2014.

The first few of these watches have now hit the market and Apple (Nasdaq:AAPL) appears poised to launch its own version in coming months. In fact, smartwatches and larger smartphones (known as phablets) are likely to be the hottest consumer electronics products this coming holiday season.

Whether these products deliver major share price gains for Apple and its peers remains to be seen. For the most part, analysts are bullish.

But in the consumer electronics space, winners can create losers. And few companies have as much to lose from these product categories as Garmin (Nasdaq:GRMN).

For years, we've been buying stand-alone GPS devices from Garmin and others (which are known in the industry as personal navigation devices or PNDs). Garmin and its peers have managed to forestall any threat from increasingly functional smartphones, largely because such phones had smaller screen sizes.

"Garmin has talked periodically over the past two years that its larger screen size has played an important role in not only stemming some of the (average selling price) erosion PNDs have seen historically, but is also providing meaningful differentiation from the smartphones that have steadily eroded the PND device class since 2007," notes Pacific Crest's Brad Erickson.

Garmin.jpg
Flickr/x1brett
The advent of smartwatches poses an emerging threat to Garmin's wearable fitness device business.

Trouble is, that screen size advantage is going away as phablet sales start to rise. And those smartwatches: Get ready for step-by-step spoken directions right from your wrist, enabling you to keep your eyes on the road at all times.

More importantly, the advent of smartwatches poses an emerging threat to Garmin's wearable fitness device business. Before delving in to this topic, kudos are in order to my colleague Adam Fischbaum, who predicted 30% upside for Garmin back in January. Shares are indeed up 30% since then.

At the time, he wrote that "Garmin has leveraged its strength as a consumer navigation electronics brand by introducing Vivofit, a wearable fitness band that tracks users' progress toward their fitness goals."

Yet since then, Garmin has seen a variety of competitors enter the market. Apple's smartwatch is expected to have the same functionality. Indeed, the whole fitness tracker category may have already peaked.

A wide range of recent consumer reviews suggest that smartphones may be more accurate when measuring heart rates. "While 2014 is clearly a breakout year for the fitness tracker sub-segment, we have reservations about the category's ability to sustain growth into next year, as early indications around user trends appear relatively unfavorable," notes Pac Crest's Erickson.

You almost have to feel bad for Garmin. It has been working hard to establish new niches to offset the slowly-eroding PND business, but it's finding the going to be tough.

For example, its Virb high-definition wearable camera could have been quite popular -- were it not for the tremendous success of GoPro (Nasdaq:GPRO). "Our checks continue to point to Virb being a veritable non-starter for Garmin," writes Erickson.

To be sure, Garmin's sales are still rising -- albeit at a tepid 2% pace in 2014 and 2015. Of equal concern: Erickson thinks EPS will be stuck in neutral: He forecasts $2.85 in per-share profits in 2015, flat with last year's profit result. Uninspired growth on the top and bottom lines is at odds with a resurgent stock price. The fact that shares trade for around 20 times next year's profits seems like too high a multiple for a company with such growth constraints.

Risks to Consider: As an upside risk, Garmin has a strong franchise in the GPS aviation and marine markets, and could attract a potential buyer for these segments.

Action to Take --> Garmin has swiftly addressed the slowing PND market by pushing into new verticals. But the company's deep-pocketed rivals such as Apple, Samsung and Google (Nasdaq:GOOG) are making it ever harder to compete. Roughly flat sales in 2014 and 2015 could be followed by outright sales declines in coming years, and the current rich valuation for this stock implies considerable downside ahead.

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