Not too long ago, the phrase “I’m going to work from home tomorrow” often drew an eye roll or an exasperated sigh from bosses. Remote work, it was feared, was nothing more than an unofficial vacation day.
Then COVID arrived. A survey by Owl Labs found nearly 70% of full-time employees were working remotely during the pandemic. Whether they wanted to accept it or not, companies had to adapt to the reality of a remote workforce.
And with all this work from home, it has become necessary to furnish home offices – millions of them. Many people needed to upgrade their PC or various accessories – a new webcam, a new mouse, a headset or a keyboard. And one of the biggest beneficiaries of this trend has been Logitech (NASDAQ:LOGI).
Business boomed during the pandemic
After office buildings emptied in the spring of 2020, workers rushed to buy new webcams and headsets for virtual meetings. Logitech, which produces add-on PC peripherals, immediately began reaping the benefits.
Logitech’s pre-pandemic revenue for the 12 months ending March 31, 2020 was $3.0 billion. Over the next 12 months, revenue jumped 77% to $5.3 billion. Earnings more than doubled from $2.66/share to $5.51 over the same period.
This massive growth led to a similar rise in the share price. Logitech shares nearly tripled (193% return) between February 2020 and May 2021. For comparison, the S&P500 increased by 25% over the same period.
However, since peaking at $140.17, Logitech shares have fallen to a current price of around $78, a loss of 44%. So why has the market shunned Logitech for the past eight months? In short, investors do not believe that growth is sustainable.
The stamina of remote work
The thesis — that the surge in remote work was a one-in-a-generation outlier — doesn’t hold up when you dig into it.
First, we need to consider the size of the remote workforce – the number of home offices. Nicholas Bloom, a Stanford University professor and remote workforce expert, estimates that 50% of the US workforce will be fully or partially remote after the pandemic is receding. Professor Bloom says only 10% of jobs will remain entirely remote, but a staggering number 40% will transition to a hybrid model that incorporates one to two days of fully remote work per week.
Second, we need to consider home office expenses. According to Owl Laboratories, less than 25% of businesses pay the cost of home offices. This situation represents an opportunity for Logitech. With so few organizations having reimbursed employees for the cost of setting up and maintaining a home office, there could be a second wave of purchases once these reimbursement programs are established. Instead of cutting home office spending, Logitech could benefit from a second wave of more modest spending as companies invest in their permanent remote workforce.
A defensive technological value
The recent plunge in Logitech’s stock price fits a larger trend: technology has fallen out of favor. Consider two sector ETFs: Technology ETFs Invesco QQQ Trust (NASDAQ: QQQ) and the SPDR Energy Select Sector Fund (NYSEMKT:XLE).
Over the past five years, the technology sector has beaten the energy sector – and it wasn’t even close. ETF Invesco QQQ returned 181%, while ETF XLE lost 5%. But since June 2021, it’s a different story, the energy sector’s XLE has beaten Invesco’s QQQ, by 34% to 7%. It’s all part of a larger trend: Investors have been abandoning growth stocks in favor of value stocks amid fears about future interest rate hikes and slowing macroeconomic growth. As a result, high-multiple technology stocks fell and low-multiple energy stocks benefited.
However, Logitech is not a high-flying tech stock trading at a garish valuation, far from it. The CFRA estimates that year-over-year revenue is expected to increase 3.8% in fiscal 2022 and 4.8% in fiscal 2023. Additionally, the stock is trading at 17.6 times earnings, has a forecast dividend yield of 1.2% and generates $8.20/share in free cash. to flow.
Is Logitech a buy here?
When determining if Logitech is right for your wallet, you should keep in mind what the company is – and just as important – what he is not. Simply put, Logitech isn’t sexy. Its P/E ratio of 17.6 is not only well below the average multiple of the S&P 500 (24.7), but it is dwarfed by the average multiple of the technology sector of 32.4. The company’s P/E stance likely reflects lower investor expectations.
After growing revenue, profits and margins during the pandemic, Logitech’s challenge is to sustain those gains as inflation and rising interest rates become a reality.
Yet after its recent price drop, those headwinds are more than cooked. Adding Logitech to your portfolio might be a prudent choice as future growth seems limited, but that doesn’t make it a bad choice.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.