05 Aug Logitech (LOGI)

Today’s stock report subject Logitech manages to tick quite a few boxes for seeing some solid growth in the next few years. For starters, it’s tied to the e-sports and gaming booms that are sweeping the US and the globe. Secondly, it’s in a prime position to take advantage of the work from home phenomenon that took over during the pandemic and which we will predict will continue well into the future. And thirdly, its share price has fallen by nearly twenty percent since the start of June and after its earnings report at the end of July. Should we do a little bit of bottom fishing?

No doubt you’ve probably already heard of Logitech. If you’re reading this on a PC right now there’s a very good chance you got here by using your Logitech keyboard and mouse. I certainly did. A Swiss company, founded in 1981, Logitech is one of the largest computer hardware makers in the world. But they make so much more. Remote controls, security cameras, webcams, computer speakers, accessories for smartphones and tablets, video conferencing equipment, gaming products, and headphones and earbuds. It’s a one stop shop for computer peripherals and audio wear.

So it’s not surprising that their target market is computer users. And hasn’t the pandemic helped out there? People have been stuck in their homes across the globe throughout 2020. And it’s something that is still going on here in Australia and in many other places. We’ve mentioned on countless occasions here in these stock reports about how the working life as we knew it has gone forever. According to Ray Morgan Research, at least one-third of Australians worked from home last year, with the percentage for office workers around the 50% mark. This has continued into 2021 and is likely to keep happening until covid is eliminated – whenever that may be.

But that’s not the end of it. Even after we see some clear air from the virus most sociologists believe that the future of white-collar work will merge into a sort of hybrid model of working from home and working in an office. Many people, who aren’t in lockdown, are doing this already. A few days heading into the office bookended by a couple of days of working from home. Studies have shown there has been no downside to productivity levels, in fact, the opposite. And it keeps employees happy and cuts down costs for employers. It’s a win/win all around.

And who benefits when more than a third of the population needs to set up a home office or workstation? The companies that make keyboards and mice, and speakers and webcams, and computer headsets, and anything else that is needed to use a computer and participate in a video conference. It’s Logitech’s bread and butter. Other than those who make the computers themselves there is no one else who benefits more.

They are getting the same benefits from the boom in e-sports and gaming. It’s another sector of the economy that has benefitted from the pandemic, and its success is likely to continue well into the future. We wrote about e-sports back in 2020 and it went like this:

“However, there’s one sporting segment that has been growing at an unbelievable rate over the last few years and has been almost entirely unaffected by the coronavirus pandemic. It is the world of e-sports. Now many of you, not unlike myself, will be dubious to the fact that playing video games can actually be considered a sport. Like me, you’re probably picturing a twelve-year-old sitting in his parent’s basement eating Doritos and playing Tetris or Space Invaders. But let me assure you, the industry has moved on and it is a multi-billion dollar business that is becoming more popular by the second.

E-sports (or electronic sports) take the form of organised multiplayer video game competitions played between professional players, in both individual and team formats. The internet was responsible for taking online gaming into “basements” across the world. So that now, someone in Australia can take on anyone in the world without leaving his or her own home. Since the early 2000’s, and especially since 2010 onwards, players have been battling it out in games such as League of Legends, Dota, Counter-Strike, Overwatch, Fortnite, and Starcraft amongst many others. There are national and world championships for most games and sponsored leagues played out all over the world, watched by audiences of thousands in stadiums, and millions more at home online.

The global e-sports audience is currently sitting at around 300 million and is expected to double to 600 million over the next three years. The live streaming platform Twitch, which was purchased by Amazon (AMZN) in 2014 for almost $1 billion, had over 3.8 million players streaming their games in February of 2020, with 15 million viewers a day, and 140 million a month. This level of viewership is much larger than what the major television networks get in the US. In fact, many of the networks have begun investing in the sector to try and grab a share of the huge audience numbers that have been leaving traditional media.”

The same phenomenon is happening in the gaming sector. We also wrote about this last year in our TTWO stock report: ” the gaming segment has undergone massive changes in recent times, thanks to what the industry calls the “Fortnite effect”. If you don’t know what Fortnite is, then go and ask your nearest teenager. The game has been a phenomenon, not just for the number of players it has attracted, but for the price structure surrounding it. So what’s so unique about the price – well, the game is free to play. Yes, you read correctly, totally free. But that hasn’t stopped its maker Epic games from raking in $1.2 billion in revenue in its first year.”

The computer game industry pulled in $178.4 billion in 2020 as a majority of people couldn’t leave their homes. This was up from $155.9 billion in 2019. It is predicted that the market will be worth approximately $217 billion in 2023, and $268 billion in 2025. All this money to be spent on gaming, and who is the major supplier of gaming equipment? That’s right, Logitech. And gamers are very particular about their tools of the trade. They need the best. The fastest computer, keyboards and mice with no lag time, headsets that don’t cut out and provide clear sound. You need to know when someone is sneaking up behind you, and you need to be able to act fast to survive (well, for your character to survive at least). And the best equipment isn’t cheap.

Logitech has undoubtedly benefitted from the pandemic but it was already experiencing strong growth beforehand. The shutdowns just gave it a massive kick along. From March 2020 as everything closed down through to March this year, revenue rose by 79%, from $2.9 billion to $5.2 billion. It is projected this will more than double again by 2025 to $449.7 million. Its share price went from the mid $60s in June 2020 through to its peak in May of $140.17.

However, recently the stock has had a pullback of sorts. Expectations that the computer industry will slow this year, mostly thanks to chip shortages and the like has fuelled some of the negative news. Despite the fact that Logitech has continued to shine. Its last earnings report showed sales were up 58% year on year, and operating profit doubled. The share price fell 10% despite the top and bottom line both easily beating estimates. Sales of gaming peripherals were up 76%, up 73% for webcams, and 72% for video collaboration tools. Investors, however, were disappointed management failed to lift guidance.

The share price has now fallen back to $108, giving it a price to earnings ratio of just 17.62. That’s great value for a stock with so much growth potential. I always like to take advantage of these dips in price. Especially when the company concerned hasn’t put a foot wrong. It seems like a no-brainer. With gaming and e-sports continuing to grow, and the work from home/office hybrid phenomenon in full swing there’s a big future in store for Logitech and the share price doesn’t seem to be matching this at the moment. Be on board for when it does.