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3 Reasons Logitech International Stock Is a Buy

John Ballard, The Motley Fool

Shares of Logitech International (NASDAQ: LOGI) have significantly outperformed the broader market over the past five years. Gamers have been buying the company's mice and keyboards to climb the ranks in popular esports titles like Fortnite and Overwatch, while new areas of opportunity in podcasting and game streaming -- where people watch others play video games -- are opening the door for growth in microphones and webcams. 

Here are three reasons why Logitech stock is a buy.

A glass jar in the shape of a piggy bank with an upward trending arrow made out of grass inside the jar.

IMAGE SOURCE: GETTY IMAGES.

1. Valuation

First, here's a quick review of how Logitech has performed and where the stock's valuation currently stands.

Bracken Darrell stepped in as Logitech CEO in 2013 and steered the company toward higher-quality product design and innovation. The result of that effort was six consecutive years of revenue growth. 

Since the end of fiscal 2014 (whose fiscal year ended in March), revenue has grown a cumulative total of 39%, driven primarily by robust growth in the gaming and video collaboration segments. 

What's most impressive is the improvement on the bottom line. Gross margin has inched higher, and that allowed for an extra boost in profit. Over the last five years, earnings from continuing operations are up 232%. 

Logitech sells almost every computer peripheral you can think of, but here's a look at how its top three segments have performed over the past three years relative to total revenue.

Segment 2019 2018 2017
Gaming $648 million $492 million  $314 million
Keyboards & combos $537 million $498 million $480 million
Video collaboration $260 million $183 million $127 million
     Total revenue $2.788 billion $2.567 billion $2.221 billion

Data source: The company. Years are fiscal years ending in March.

Despite management's guidance calling for further growth in sales and profit this year, the stock price isn't moving higher. But that won't last long as profits continue to grow.

The stock's forward price-to-earnings ratio stands at 18.6 times this year's earnings estimate. Logitech also pays a dividend yield of 1.76%.

2. Design wins

The company's performance in recent years is impressive, given that there are many brands of computer peripherals to choose from. Obviously, Logitech is doing something right with its product design to stand out in a crowded field.

Over the last year, Logitech was awarded 25 design wins. Since Darrell joined the company as president in 2012, Logitech has won a staggering 250 design awards. Three of the company's newer products received a Gold award -- the International Design Awards' highest honor -- which went to the Logitech Crayon, Logitech POWERED, and Logitech K600 TV. 

Logitech makes a variety of computer peripherals at mid-range price points, but some of the company's best work is on display in the gaming segment. The company's Pro series of gaming mice, keyboards, and headsets are gaining recognition in a market where gamers can be very picky about their gear. 

The Logitech G Pro line of mice and keyboards can regularly be seen on stage at Activision Blizzard's Overwatch League, in which Logitech is the official sponsor of the London Spitfire, along with several other players from other teams that use the company's products. A strong representation of Logitech's brand in esports greatly helps market the brand to nonprofessional players. 

3. Growth in game streaming and podcasting

Along with esports, Logitech is seeing rising demand coming from the game streaming and podcast markets, which has fueled demand for other essential products needed for broadcasting, such as microphones and webcams.

There are 15 million people who broadcast their gameplay for others to watch, according to Streamlabs. That number is estimated to reach 19 million this year. Those are millions of potential customers for Logitech's products.

Additionally, podcasting is on the rise, and that obviously could translate to growing demand for Logitech's microphones. Logitech acquired Blue Microphones for $117 million last year in anticipation of the growth opportunity in this booming market. The percentage of people who have listened to a podcast is now 51%, up from 40% in 2017.

A final word

One reason that may explain why Logitech stock has remained stagnant despite ongoing growth in the business is the trade war between the U.S. and China. China makes a lot of products for Logitech, and investors are concerned about the impact of a 25% tariff on those goods. 

However, Darrell recently said on an episode of Mad Money on CNBC that moving manufacturing in and out of China is something they do every quarter. Logitech reported an improvement in gross margin of 1.6 percentage points last quarter, partly driven by a reduction in logistics costs. 

Whether tariffs become a problem or not in the short term, Logitech looks like a long-term winner. As Darrell said on the company's most recent earnings conference call, gaming is "a full-blown secular tidal wave," and after six consecutive quarters of double-digit sales growth in the gaming segment, he doesn't see the momentum slowing down anytime soon. 

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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.