Logitech: Initiating Coverage With No Moat and $55 Fair Value Estimate

We’re initiating coverage of Logitech LOGN with a no-moat rating and $55 (CHF 50) fair value estimate. Our fair value estimate implies a 2023 enterprise value/EBITDA multiple of 16.5 times and a P/E ratio of 22 times. Our estimates are broadly in line with FactSet consensus, but we think the shares currently look overvalued. We surmise the market is betting that high margins in the video collaboration segment are more durable than our expectations.

Logitech is a leader in the computer peripherals market. The company specializes in designing and manufacturing mice, keyboards, webcams, and conference room video cameras, among other items.

We don’t think Logitech has a moat despite our robust forecast for ROIC. We do think traditional products like mice, keyboards, and webcams are moatworthy based on a brand intangible asset, as evidenced by market shares around 50%-70%. However, we have less confidence in gaming and video collaboration, Logitech’s growth engines, which should account for the majority of sales in the long term. Gaming is very competitive with a short refresh cycle. Gamers’ desire for the latest and greatest technology leaves this space continually open to disruption. In video collaboration, we think competition will intensify as rivals start to erode Logitech’s first-mover advantage in plug-and-play USB conference room cameras.

We expect high-single-digit growth per year for Logitech over the medium term, except for fiscal 2024, when sales should decline due to the ongoing hangover from demand pulled forward in the pandemic. We expect future growth to be driven by gaming and video collaboration where we expect strong double-digit growth over the next several years. We expect non-GAAP operating margins to rise to around 13% over the next five years due to operational efficiency measures and mix as the high-margin video collaboration segment contributes a larger proportion of revenue. Beyond that, we expect margins to fade with increasing competition.