There are more ways to invest in the growing $135 billion video game industry than buying the shares of leading game makers. Over the last few years, Logitech International (NASDAQ:LOGI) and Turtle Beach (NASDAQ:HEAR) have seen surging demand for accessories, such as computer mice and headsets that are designed for gaming.

Logitech stock has more than doubled shareholders' investment over the last five years. On the other side, shares of Turtle Beach are up a staggering 3,200% over the last year. However, the stock is underwater by 74% compared to where it traded five years ago.

So which stock should investors buy? We'll review both companies' recent performance and strategy to find out.

A group of young men and women wearing headsets, sitting at a row of computers, competing in a video game.

IMAGE SOURCE: GETTY IMAGES.

A well-diversified peripheral maker

Logitech is diversified across several product categories, including general-use computer keyboards and mice, webcams, pointing devices, conference-room video, microphones, wireless headphones, mobile speakers, and more. Thanks to the growing popularity of competitive online gaming, gaming peripherals have become Logitech's largest product category by sales.

Here's how Logitech's largest product categories performed through the first nine months of fiscal 2019 (which ends in March):

Product Category Revenue for Nine Months Ended Dec. 31, 2018 Change (YOY)
Gaming $510 million 40%
Pointing devices $405 million 5%
Keyboards & combos $404 million 12%
Audio & wearables $212 million 8%
Mobile speakers $208 million (31%)
Video collaboration $190 million 49%
Total revenue $2.164 billion 10%

Data source: Logitech. YOY = Year over year.

Except for mobile speakers and smart home, Logitech has delivered solid revenue growth overall. On a trailing 12-month basis, total revenue increased 10.9% year to date through the fiscal third quarter, while earnings rose 17.5%. Analysts expect the company to grow earnings by about 12% annually over the next five years.

Management is optimistic about the long-term prospects of gaming and video collaboration, and it's easy to tell why by looking at how much these two product categories have grown over the last few years. In the fiscal first quarter of 2017, the gaming category generated just $57 million in sales, but now gaming is over $200 million as of the last quarter. Video collaboration sales were only $24 million at the start of fiscal 2017 but now generate three times as much in a single quarter.

Gaming seems like a sustainable growth market for the company, because esports is only going to get more popular. The worldwide audience is expected to reach 645 million viewers by 2022, according to market researcher Newzoo. Plus, Logitech is going after a tremendous opportunity to equip more conference rooms around the world with video cameras. About 98% of conference rooms around the world don't have video, so there's a very long runway of growth here.

Check out the latest earnings call transcripts for Turtle Beach and other companies we cover.

A pure play gaming headset maker (for now)

While Turtle Beach doesn't have the diversity of Logitech, the headset maker rode the esports wave in style last year. In the third quarter of 2018, revenue soared 107% year over year. Strong revenue growth lifted gross margin by 7 percentage points to 41%. That translated to healthy gains on the bottom line, as Turtle Beach went from losing money in the third quarter of 2017 to reporting a profit of $0.91 per share.

Management expects fourth-quarter revenue to be up 18%, while earnings per share are expected to be down 13% year over year due to a higher share count. That should bring full-year revenue to approximately $270 million, an increase of 81% over 2017, while full-year earnings per share should be $2.55.

As for the stock's valuation, investors are not giving Turtle Beach full credit for that robust earnings performance. The stock currently trades for a trailing P/E multiple of just 5.9. The reason is that there is uncertainty as to how often gamers will buy or upgrade their headsets, making it difficult to assess the stability of the company's annual revenue.

Gaming is much more of a social activity these days. Most gamers play to be social, according to a survey by Nielsen. This has fueled robust demand for Turtle Beach's headsets, but once a gamer has a good headset, will they buy another one? While Turtle Beach management points to surveys showing that players are expected to upgrade every 23 months on average, it's difficult for investors to pin their hard-earned money on the results of a survey.

I think Turtle Beach management is fully aware of this potential risk. That's why they want to branch out to selling keyboards and mice designed for gaming. Turtle Beach's current addressable market of selling only headsets is about $1.2 billion, but that could reach an estimated $3.8 billion if they offer other peripherals.

Of course, Turtle Beach would butt heads with Logitech in the keyboard and mouse market, but both companies already compete in the headset market, and both companies are growing just fine. Additionally, Turtle Beach has several partners across game-streaming personalities and esports organizations that help market its gear. This would likely serve it well in non-headset categories.

Which is the better buy?

Before the verdict, here's how both stocks measure up on valuation:

Metric Logitech International Turtle Beach
Market cap $6.3 billion $220 million
Trailing P/E 25.64 5.92
Forward P/E 18.79 9.45
PEG ratio 1.68 0.31
P/Sales 2.28 0.86

Data source: Yahoo! Finance.

Even though Turtle Beach stock looks cheap, I think Logitech is in a much stronger competitive position with its more diverse offering. I'm tempted by Turtle Beach's low valuation, mainly because it has one of the leading brands in gaming headsets, and I think the company is in an excellent position to take advantage of its increased profitability to expand into other markets and keep the momentum going.

Still, manufacturing headsets is a different undertaking from keyboards and mice. It might be more challenging; esports professionals and casual gamers alike are picky about their mice and keyboards. A lot of technical considerations go into designing a quality gaming mouse, such as weight, shape, and tracking accuracy of the sensor. Also, it's a very crowded market, with several quality mouse makers designing premium and budget mice for gamers of all types: professional, hardcore, and casual.

All in all, I need more time to see how Turtle Beach's strategy works out before I would consider investing my money in the stock.

On the other side, Logitech's business is diversified across so many categories. If one category, such as gaming, were to slow dramatically, other products target different computing needs that can pick up the slack.

For these reasons, if you're looking for a pick-and-shovel play to invest in the $135 billion video game industry, I believe Logitech is the better buy.