Computer peripherals giant Logitech International SA (LOGI, Financial) was among the biggest movers in the Nasdaq on Tuesday, with shares spiking 11% on the news that the company beat earnings per share estimates by 2 cents and reiterated its guidance for full fiscal 2023.
At first glance, it may seem strange the market had such an extreme reaction to news that mostly reaffirms prior projections. However, even after an 11% jump, Logitech still looks steeply undervalued based on a number of metrics, which could help explain the volatility. Here is why I think the market may still be selling Logitech short.
Computer peripherals dominance
Logitech is one of the most well-recognized names in the computer peripherals market. Revenue for its fiscal year ended March 2022 was $5.48 billion. For comparison, Absolute Reports estimates the global computer peripherals market size at around $13.22 billion. The research firm also estimates the computer peripherals market will grow at a compound annual growth rate of 5.1% through 2028.
In the short term, Logitech has suffered from the pandemic-driven boom and bust in the computer and gaming peripherals markets. The pandemic caused a significant spike in demand for at-home entertainment, which was always bound to eventually cause unfavorable comparisons as people began going out more and playing fewer video games.
Thus, in its fiscal fourth quarter of 2022, the company’s revenue plummeted 20%, bringing its three-year revenue per share growth rate down to just 21.9%. A huge earnings per share spike in 2020 created even more unfavorable bottom-line comparisons.
On Oct. 25, the company reported its most recent earnings results for the fiscal second quarter of 2023, which ended in September 2022. Revenue of $1.15 was down 12% year over year, missing estimates by $40 million. Meanwhile, earnings per share came in at 84 cents on a non-GAAP basis, declining 20% year over year but beating estimates by 2 cents.
Headwinds are steep and systemic, but not permanent
It is undeniable that the headwinds facing Logitech and its stock are steep at the moment. Moreover, most of these are not company-specific issues that can be fixed, but rather systemic industry-wide issues that Logitech can do nothing about.
Inflation continues to rise at a rapid clip globally, cutting into consumers’ discretionary spending budgets. A stronger U.S. dollar is devaluing Logitech’s non-U.S. sales, bringing its sales down an additional 5% in the fiscal second quarter.
There are some concerns among analysts that the Russia-Ukraine war could cause Logitech’s materials prices to rise, but so far, this has not yet made its way to the company’s balance sheet, as it managed to reduce operating expenses roughly in line with its decline in volumes in the fiscal second quarter.
Despite weakness in some areas, gaming revenue decreased at a lower clip than the overall revenue in the recent quarter, down 4% due to declines in PC and console gaming while growth in simulation products remained strong.
Forbes contributor David Trainer expects Logitech’s gaming peripherals to grow at a CAGR of 10% through 2025, driven by a strong reputation for brand reliability. Performance is important in gaming, and Ranker.com, a site where users can vote for their preferred brands for specific products, ranks Logitech as the best mouse and keyboard manufacturer.
Segments that have lower adjacency with gaming and business have remained relatively isolated from the pandemic-related boom and bust. These included mobile speakers, which saw sales rise by 6% in the second quarter, as well as pointers (up 3%) and certain video collaboration products. However, these more stable segments are few and far between.
Demand for computer peripherals will not decline forever, though. When the market cycle turns in Logitech’s favor again, it should see sales rise accordingly, driven by brand strength and quality.
Valuation analysis
Given Logitech’s market dominance in computer and gaming peripherals, it is a little surprising to see it trades at a price-earnings ratio of 16.41 as of this writing, which is about in line with the median for the hardware industry. This falls below Logitech’s 10-year median price-earnings ratio of 22.45. According to the Peter Lynch chart, the stock has historically traded in a pretty tight range between its median valuation and the Peter Lynch earnings line (which is what its price would be if it traded at a price-earnings ratio of 15).
From these two data points, it seems likely that there is a little bit of room for multiples expansion, but Logitech’s future share price growth will mostly depend on real earnings growth.
The GF Value chart rates Logitech’s stock as significantly undervalued. This valuation method considers a stock’s historical returns, past valuation multiples and analysts’ estimates of future results. Due to the low amount of historical variation in Logitech’s price-earnings ratio, this calculation is not skewed by recent periods of unusually high valuation multiples like some other stocks are.
Analysts estimates from Morningstar (MORN, Financial) are projecting a slight decline in fiscal 2023 revenue to $4.92 billion, with the top line expected to recover to $5.48 billion in fiscal 2025. Meanwhile, earnings per share projections are $2.94 for fiscal 2023 and $3.57 for fiscal 2025.
Logitech itself reaffirmed its guidance for full fiscal 2023 on its second-quarter earnings report, guiding for a year-over-year revenue decline of 4% to 8% in constant currency and non-GAAP operating income between $650 million and $750 million (versus $774 million in fiscal 2022, $1.14 billion in 2021 and $276 million in 2020).
Takeaway
Investors have sold off Logitech since the computer peripherals market began to take a turn for the worse midway through 2021. Due to the company’s earnings and sales declines, this had resulted in valuation ratios that are only slightly lower than they were around the stock’s all-time highs, which is interesting to note. Since this is a hardware company, the market seems more attuned to its real value rather than speculation.
That being said, the stock still appears to be undervalued compared to its long-term potential, a conclusion which is supported by the fact neutral news caused the stock to spike by 11%.
