Not that long ago, the sentence, "I'm going to be working from home tomorrow," would often draw an eye roll or an exasperated sigh from bosses. Remote work, it was feared, was nothing more than an unofficial vacation day.
Then, COVID happened. A survey conducted by Owl labs found that nearly 70% of full-time employees worked remotely during the pandemic. Whether they were eager to accept it or not, businesses had to adapt to the reality of a remote workforce.
And with all that working from home came a need to furnish home offices -- millions of them. Many people needed to upgrade their PC or various accessories -- a new webcam, mouse, headset, or keyboard. And one of the biggest beneficiaries of this trend was Logitech (LOGI +0.49%).
Image source: Getty Images.
Business boomed during the pandemic
Once the office buildings emptied in the spring of 2020, workers scrambled to buy new webcams and headsets for virtual meetings. Logitech, which produces PC add-on devices, immediately began to reap the benefits.
Logitech's pre-pandemic revenues for the 12 months ending on March 31, 2020, were $3.0 billion. Over the next 12 months, revenues surged 77% to $5.3 billion. Earnings more than doubled from $2.66/share to $5.51 over the same period.
That massive growth led to a similar swell in the stock price. Logitech's shares nearly tripled (193% return) between February 2020, and May 2021. For comparison, the S&P 500 rose 25% during the same stretch.
Although, since peaking at $140.17, Logitech shares have retreated to a current price of about $78 -- a loss of 44%. So why has the market shunned Logitech over the last eight months? In short, investors don't think the growth is sustainable.
The staying power of remote work
The thesis -- that the surge in remote work was a once-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 sheer number of home offices. Stanford University professor Nicholas Bloom, an expert on the remote workforce, estimates that 50% of the U.S. workforce will be fully or partially remote after the pandemic recedes. Professor Bloom argues that only 10% of jobs will remain fully remote, but a staggering 40% will move to a hybrid model which incorporates one to two fully remote workdays per week.
Second, we need to consider home office spending. According to Owl labs, less than 25% of companies are paying for the cost of home offices. This situation presents an opportunity for Logitech. With so few organizations having reimbursed employees for the costs of setting up and maintaining a home office, there may be a second wave of purchasing once those reimbursement programs are established. Instead of home office spending falling off, Logitech might benefit from a second, more modest wave of spending, as companies invest in their permanent remote workforce.
A defensive technology stock
The recent fall in Logitech's share price corresponds to a broader trend -- technology has fallen out of favor. Consider two sector ETFs: The tech-heavy Invesco QQQ Trust (QQQ +2.93%) and the Energy Select Sector SPDR Fund (XLE 2.15%).
Over the last five years, the technology sector has trounced the energy sector – and it wasn't even close. The Invesco QQQ ETF has returned 181%, while the XLE ETF lost 5%. But since June 2021, it's been a different story, the energy sector's XLE has beaten Invesco's QQQ, 34% to 7%. It's all part of a broader trend: investors ditched growth stocks in favor of value stocks because of fears over future interest rate hikes and slowing macroeconomic growth. As a result, high-multiple tech stocks have fallen, and low-multiple energy stocks have benefited.
However, Logitech isn't a high-flying tech stock trading at a gaudy valuation -- far from it. CFRA estimates that year-over-year revenues should grow 3.8% for fiscal year 2022 and 4.8% in fiscal 2023. Moreover, the stock trades at 17.6 times earnings, sports a 1.2% forward dividend yield, and generates $8.20/share in free cash flow.
Is Logitech a buy here?
When considering if Logitech is suitable for your portfolio, you must keep in mind what the company is -- and just as importantly -- what it is not. Simply put, Logitech isn't sexy. Its P/E ratio of 17.6 is not only well below the average S&P 500 multiple (24.7), it's dwarfed by the technology sector average multiple of 32.4. The position of the company's P/E ratio likely factors in investors' lowered expectations.
After growing revenues, earnings, and margins during the pandemic, Logitech's challenge is to maintain those gains as inflation and higher interest rates become a reality.
Yet, after its recent decline in price, those headwinds are more than baked in. Adding Logitech to your portfolio might be a cautious pick since future growth looks limited, but that doesn't make it a bad one.
