In a bid to strengthen its global reputation among professional musicians, Logitech International S.A. LOGI is pursuing innovation and expanding its music business’ product lines to tap the high-growth accessories market.

Logitech has been able to leverage its software and go-to-market capabilities to drive market share gains. The company’s digital campaign initiatives including banner ads, videos and paid social placements is part of its move to become a music lifestyle brand. Recently, Logitech’s subsidiary Ultimate Ears, launched a party speaker — Megaboom. The company’s Ultimate Ears unit is set to launch a new line of Alexa-enabled speakers this holiday season. A new marketing campaign is already in place for the same. Also, going forward, Logitech remains optimistic that its Alexa voice-control for its Blast, MegaBlast and Power Up speakers will spur growth in the highly competitive wireless speaker market.

Existing Business Scenario

Over the past three years, Logitech has grown in Bluetooth Speakers and Video Collaboration businesses via advanced offerings. Logitech remains optimistic that steady traction of product lines, as well as positive industry trends will continue to fuel growth. Apart from this, Logitech’s cloud-based video conferencing services are also among the key growth drivers.

Moreover, the company’s strategic acquisitions have aided it to secure a place in the core market and grab greater market share. Recently, the company acquired Astro Gaming — a popular console gaming headset maker, which will enable it to carve a niche in the gaming peripheral market. The company bought wireless earbud maker —– Jaybird, in April 2016. Also, the company became a major player in Bluetooth speakers after it acquired Ultimate Ears for $34 million in 2008. We believe these buyouts will continue to supplement the company’s top-line performance, going forward.

Factors Troubling Logitech

Despite these positives, during the second-quarter fiscal 2018, Logitech’s Music business, which comprises Mobile Speakers units and Audio-PC & Wearables witnessed mixed performance. During the quarter, Audio PC & Wearables sales rose 1.5%, largely offset by the drab performance of the Mobile Speaker segment, which declined 7%.

Also, the rising trend of smaller, mobile computing devices with touch interfaces and the declining popularity of desktop PCs have rapidly changed the market and usage models for PC peripherals and webcams. Declining demand in the company’s most profit-maximizing products like desktops and diverse porting tools are posing as headwinds.

Moreover, the company’s business remains vulnerable to unanticipated shifts in consumer buying patterns as its sales are impacted by end-user consumer demand. Over the past few quarters, the company’s tablet business has been witnessing a slump in demand, which has weighed down on its top line.

Further, the stock has put up a dismal show in recent times. Over the last three months, Logitech’s shares have recorded an average negative return of 0.4% as against the industry’s gain of 0.6%.

 

 

This apart, the technology space is highly competitive; dominated by several multinational behemoths like Microsoft Corporation MSFT, Philips PHG and Cisco Systems CSCO. In a dynamic market such as this, Logitech needs to bring in newer products that match the trend, in order to survive the competition.

Consequently, the company has been experiencing significant surges in R&D expenses, with a 10% rise registered year over year in fiscal second-quarter 2018. Although such expenses bode well in the long term, they tend to weigh on the earnings in the immediate future.

Therefore, we believe, in spite of several growth catalysts including the company’s music business are in Logitech’s favor, several other major factors are thwarting the company’s growth currently. Therefore it may be prudent to avoid this Zacks Rank #4 (Sell) stock at the moment.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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