Logitech (LOGI) isn't traditionally thought of as a PC company. And that’s fair — it doesn't make PCs.
Yet its business is deeply intertwined with the PC market. Logitech is one of the largest makers of PC peripherals, including mice, keyboards, speakers and webcams.
The company knows it has issues, and has admitted that it’s working to transition its business to one centered around new, non-PC related devices. It’s also working to expand in emerging markets.
Still, Logitech shareholders have reason to be concerned.
The Death of the (Traditional) PC
The traditional PC is in decline. In the first quarter, IDC reported the worst PC sales drop on record — a decline of 14%. The second quarter wasn't much better; Gartner said PC sales fell 11%.
At the same time, consumers are increasingly turning to tablets and smartphones for their computing needs. Tablet shipments are expected to increase nearly 70% this year.
Logitech Is a Maker of PC Accessories
Logitech, being an indirect play on the PC, has struggled. Shares are down 33% in just the last two years.
The company breaks down the various devices it sells into categories. In fiscal year 2012, traditional PC accessories (mice, keyboards, speakers) accounted for roughly two-thirds of the company’s revenue.
The other third is (mostly) composed of tablet accessories, video game accessories, security cameras and TV remotes.
Logitech’s Future in a Tablet World
Tablets still need accessories — covers, keyboards, wireless speakers, etc. — but it isn't fundamental to the experience. To put it another way, a desktop computer just isn't usable without a keyboard. On the other hand, a tablet is fully functional without one.
Moreover, as Logitech notes in its 10-K, a significant portion of its sales (last year 7%) come directly from PC OEMs. For example, Dell often sells its PCs with included Logitech accessories; tablet manufacturers don’t.
In fact, many tablet producers make their own accessories. Microsoft makes its own cover for the Surface; the keyboard hybrid has been emphasized as a differentiating factor in Microsoft’s advertising. Asus sells a keyboard dock for use with its Transformer tablet.
But thankfully for Logitech, Apple (AAPL) does not make tablet keyboards, which is likely why keyboards for the iPad seem to make up the bulk of Logitech’s tablet-related accessories.
Logitech’s tablet sales grew an impressive 174% last year. Yet, even with that incredible growth, they accounted for less than 7% of the company’s retail sales.
All in all, tablets present unique challenges for accessory makers like Logitech, and it doesn't seem likely that the market will be able to replace the traditional PC anytime soon.
At the same time, Logitech faces new competitors in the tablet space. Take Zagg, a controversial stock in its own right, but a major competitor in the mobile accessory market.
Its devices go head-to-head with Logitech’s in the marketplace (numerous reviews comparing models from the two companies are available around the web) and they generally stack up favorably.
JPMorgan went bullish on Zagg last October, arguing that it was poised to dominate the mobile accessory market. There have even been rumors that Logitech is interested in purchasing Zagg outright, perhaps as a way to consolidate the third-party mobile accessory market.
But short-sellers have consistently targeted the stock, including Citron Research. In a report in 2011, Citron noted Zagg’s reliance on Best Buy, its failure to execute, and questioned the timing of some regulatory filings.
Zagg continues to have a short interest of more than 30%, and the bears have been right — shares are down over 60% in the last two years.
Last quarter, Zagg missed earnings estimates, which led to a fairly steep sell-off. If a fast growing company like Zagg has trouble in the mobile space, how can Logitech rely on it for future growth?
Harmony Remotes to Become Obsolete
Steve Jobs told his biographer Walter Isaacson that he had cracked the TV interface problem. Too bad he didn’t realize Logitech did it first.
Logitech’s Harmony remotes are fabulous devices (the author owns one and loves it), but there isn’t going to be a need for them much longer.
In short, they're the best universal remotes available. They’re programmable, and give users complete control over their entertainment center (pressing “Watch TV” changes all the necessary inputs and powers on/off the correct devices for TV viewing; pressing “Play Game” does the same for watching a Blu Ray disc, etc.).
But this need will likely vanish in the coming years. Take Microsoft’s next Xbox -- it acts as a central entertainment hub and allows owners to switch between different activities using just their voice.
Apple's long rumored to be forthcoming iTV will very likely include some sort of amazing control mechanism. Topeka analyst Brian White said the controller would take the form of a ring and allow for hand gestures; others have speculated that some kind of iPad would serve as the remote.
At any rate, investors should expect Apple to get into the TV game at some point. Given Steve Jobs’ past comments to Isaacson, and CEO Tim Cook’s comments to NBC’s Brian Williams, an iTV still seems likely.
And analysts expect that any TV from Apple would sell well. Citing a survey, Morgan Stanley analysts said Apple could sell 13 million sets in the first year, adding $4.50 per share to the company’s earnings.
That would be good for Apple, but not Logitech. Given that its Harmony remotes are premium products selling for $70-350, the people buying them are the same sort of people that would likely be interested in an iTV.
Remotes accounted for just about 4% of Logitech’s retail revenue last year, but given other developments in the tech world (like an Apple iTV), it could fall to 0.
Investing in Logitech
Logitech has seen some significant downside in the last two years, but that slide should be expected to continue. The decline of the traditional PC should weigh heavily on Logitech, while its efforts to break into mobile will fail to fully compensate for declining PC-related revenue.