Computer peripherals manufacturer Logitech International (LOGI -2.23%) delivered stellar returns during the COVID-19 pandemic that gripped the globe in 2020 and 2021.
The stock clocked gains of more than 150% from the beginning of January 2020 to mid-2021 as its sales and profits ballooned thanks to the robust demand for computer accessories from people who were working from home or using its products for video gaming. However, a collapse in sales of personal computers (PCs) in 2022 and 2023 has weighed big-time on Logitech stock, which explains why the stock is down 21% in the past three years while the Nasdaq-100 Technology Sector index has clocked 24% gains over the same period.
Logitech stock has regained some momentum in the past year with an impressive 65% price jump. Let’s see why that has been the case and whether Logitech’s stock market rally is sustainable.
Logitech’s recent results point toward a turnaround
The Swiss computer peripherals manufacturer released its fiscal 2024 fourth-quarter results (for the three months ending March 31) a couple of months ago. The company’s revenue increased 5% year over year to $1 billion. That was in contrast to the 5% decline in revenue for the full year to $4.3 billion.
More importantly, Logitech’s non-GAAP (adjusted) gross margin increased an impressive 7.3 percentage points on a year-over-year basis to 43.6% last quarter. This solid improvement was driven by a drop in product and logistics expenses, as well as lower spending on promotional activity and a decline in inventory charges. The margin improvement suggests that Logitech doesn’t have to discount its products anymore to sell them, and a big reason why that may be the case is because of improving PC demand.
Market research firm Canalys points out that global PC shipments increased 3.2% year over year in the first quarter of 2024. The firm expects shipments to continue accelerating as the year progresses thanks to the transition to Windows 11 and the introduction of artificial intelligence (AI)-capable PCs. More specifically, Canalys is expecting global PC sales to rise 8% this year, and the rapid growth of AI PCs can help this market keep growing at a nice pace in the long run.
AI-enabled PCs are expected to account for 19% of overall PC shipments this year. By 2027, the share of AI PCs is expected to jump to 60%. Between 2024 and 2028, the AI PC market is estimated to grow at an annual rate of 44%. An increase in PC shipments should ideally help Logitech sell more of its peripherals such as mice, keyboards, and other accessories.
Meanwhile, Logitech is also looking to cash in on the AI software boom with the Logi AI Prompt Builder feature. Users can trigger the prompt builder with the simple press of a key on the keyboard or a button on the mouse without having to leave the work they are doing. The prompt builder is currently compatible with OpenAI’s ChatGPT, and the feature has been actively used 500,000 times by Logitech customers within just a couple of weeks of launch.
Though Logitech’s AI Prompt Builder may not look like a big deal right now, it could help trigger sales of its keyboards and mice in the long run because of its utility. Moreover, the prompt engineering market is forecast to clock 33% annual growth through 2030, so there is a good chance developers would want to have such functionality that Logitech is offering to boost productivity.
The above-mentioned catalysts explain why Logitech expects its fiscal 2025 revenue to increase between 0% and 2% to $4.3 billion to $4.4 billion. That points toward a recovery from last year. Moreover, analysts expect the company’s revenue to grow in the mid-single digits from next year.
LOGI Revenue Estimates for Current Fiscal Year data by YCharts
A cheap valuation means investors can still buy the stock
Though shares of Logitech have rallied impressively in the past year, the stock currently trades at just 3.6 times sales and 25 times trailing earnings. Those multiples are lower than the U.S. technology sector’s sales multiple of 8 and trailing earnings multiple of 47.
Of course, Logitech is coming off a difficult time and has yet to report eye-popping growth, but investors would do well to keep a close watch on this stock as a turnaround in the PC market thanks to the advent of AI is likely to lead to stronger growth in the future. The company’s revenue forecast for fiscal 2025 suggests that a turnaround is already in progress, and that turnaround could gain momentum thanks to the growth drivers discussed above.
