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This Growth Stock Could Take Off This Earnings Season

By Harsh Chauhan - Apr 17, 2021 at 8:15AM

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Secular tailwinds could help this company deliver solid guidance and surprise Wall Street.

The coronavirus pandemic has been a huge tailwind for Logitech International (LOGI -0.67%) as the computer peripherals manufacturer has witnessed a sharp spike in demand for its products amid the increase in remote work and online learning.

Not surprisingly, Logitech will close fiscal 2021 on a high when it releases its fourth-quarter results for the three months ending March 31, 2021, later this month. The company had recently upgraded its guidance and expects to finish the year with top-line growth of 63%. However, don't be surprised to see Logitech's momentum spill over into the new fiscal year, giving the company's recent rally a nice shot in the arm.

LOGI Chart

LOGI data by YCharts

Logitech will get better in a post-coronavirus world despite near-term concerns

Logitech's revenue is expected to jump 54% in Q4 to $1.09 billion and earnings are expected to double year over year to $0.84 per share. However, analysts expect the company's rapid growth to taper off in the new fiscal year, with revenue expected to drop 2% over fiscal 2021. Logitech itself projects a flat top-line performance in fiscal 2022.

However, Logitech seems to be playing it safe as the demand for the products it sells won't be dropping off a cliff thanks to the trends created by the pandemic. For instance, an internal survey conducted by Logitech indicates that the average number of employees working from home twice per week has tripled in the U.S. and China. Similarly, the number of remote workers has doubled in Germany amid the pandemic.

Logitech predicts that these trends kicked off by the pandemic are here to stay, and they will ultimately drive the company's sales in different ways. For instance, the company points out that products such as keyboards, PC (personal computer) webcams, pointing devices, and tablet accessories will witness an upgrade cycle in the post-pandemic era.

Earlier, people working or learning from home made refresh purchases of these devices, but now they are expected to buy better versions of these products to make their tasks easier. This won't be surprising as the sales of PCs, laptops, and tablets are expected to increase once again in 2021. Market research firm Canalys expects the global PC market to grow 8.4% in 2021, with sales of desktops, notebooks, and tablets all expected to increase.

Hand drawing stock chart return.

Image source: Getty Images.

What's more, Canalys expects the momentum to continue over a longer period, estimating a compound annual growth rate (CAGR) of 3.5% for the PC market through 2025. In all, Logitech believes that an increasing installed base of remote workspaces, the onset of a refresh cycle, and its strong market share in the peripherals space will be tailwinds for the future.

Meanwhile, the increased adoption of remote working and learning will also be a boon for Logitech's video conferencing business. Logitech reportedly controls 17% of the video conferencing market. This is a good place to be as the video conferencing market is expected to clock 19% CAGR through 2026, according to a third-party report.

Logitech is already reaping rich rewards in the video collaboration space as this segment's revenue shot up 211% in the third quarter and accounted for just over 17% of the total top line. The company is sitting on nice catalysts thanks to the changes brought to the workplace by the pandemic. However, these are not the only growth drivers for the company.

Don't forget the lucrative gaming business

Gaming was Logitech's biggest source of revenue in Q3, producing 26% of the top line. The segment's revenue shot up 73% year over year in that quarter amid solid demand for video games and related hardware. That's because video games soared in popularity during the pandemic as they gave people a way to keep themselves entertained at home.

This prompted customers to accelerate purchases of gaming-related hardware, giving Logitech a nice shot in the arm in the process. Jon Peddie Research estimates that the PC gaming hardware space added $3.6 billion in revenue last year, with sales increasing 10.3% over the prior year. The trend is expected to continue in the coming years, with a third-party source estimating that the PC gaming market could grow another 25% by 2024.

All of this indicates that the markets Logitech operate in are set for secular growth over the long run. This is probably the reason why Logitech expects to log annual revenue growth between 8% and 10% over the long run, while also targeting adjusted gross margin between 39% and 44%, compared to its earlier expectation of 36% to 40%.

It won't be surprising to see Logitech deliver better-than-expected guidance later this month considering the pace at which it expects its revenue and margins to increase, and that could send this growth stock higher after earnings.

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