CRSR DD – A Compelling Growth Story

by ksb041200

About Corsair Gaming

Corsair Gaming manufactures a variety of gaming/streaming related goods. This includes tower cases, keyboards, headsets, audio equipment, and entirely pre-built PCs. Therefore, their primary sources of revenue are derived from manufacturing hardware (rather than software).

Thesis

Given the expected growth of gaming, esports, and streaming, Corsair at it’s current valuation (roughly $3bn) is undervalued. I will attempt to justify this through environmental, financial, and strategical analysis. Then I will assess potential risks/threats to Corsair moving forward.

Overview

In the environmental analysis I will focus on Corsair’s competitive environment. Specifically, I will review what I believe are Corsair’s main competitive advantages.

In the financial analysis I will examine historical statements, as well as address projections. I will describe why I am confident in Corsair’s valuation and financial health.

Through strategic analysis I will further illustrate Corsair’s competitive advantage, and how management can execute that. Particularly, I believe Corsair’s acquisition strategy offers a compelling growth story.

Finally, I will cover common criticisms and potential vulnerabilities to Corsair’s strategy/growth.

Environmental

The market for gaming components and peripherals is naturally not free of competition. Logitech, Razor, and a number of other brands offer budget and high-end components and peripherals.

I believe, however, that Corsair has and will continue to establish consumer loyalty. Corsair (in a dated article) was among top brand loyalty for peripheral gaming brands.1 I was unable to find more recent information, but I believe this is indicative of Corsair being one of the most desired brands in the market. However, Corsair and other manufacturers still face pressure on things such as price point and consumer reviews, and can’t rely wholly on reputation or brand name.

The Elgato division is also incredibly successful in the creator/competitive gaming peripherals market. Elgato’s range of products, like Corsair, are seen as the premium within its market. The gamer and creator segment is Corsair’s fastest growing, boasting a 104% YoY revenue growth for the fourth quarter. Given the excellent reviews on Elgato’s streaming hardware, I’m confident the streaming segment will continue to see growth.2

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The CAGR for esports through 2026 is expected to be 20%.3 Given Corsair’s correlation to the esports industry, this inspires confidence in growth outlooks.

It is my belief that Corsair is well positioned within a very hot market that will continue to see growth.

1 newzoo.com/insights/articles/the-disconnect-between-brand-loyalty-and-sales-in-the-gaming-peripheral-market/.

2 www.elgato.com/en/stream-deck-xl.

3 www.globenewswire.com/news-release/2021/02/02/2167964/0/en/The-eSports-market-is-expected-to-register-a-CAGR-of-20-during-the-forecast-period-2021-2026.html#:\:text=Filings%20Media%20Partners-,The%20eSports%20market%20is%20expected%20to%20register%20a%20CAGR%20of,the%20forecast%20period%2C%202021%2D2026).

Financial

Corsair has seen significant and consistent revenue growth. Last year, revenue was $1.7bn, meaning the trailing price to revenue ratio is roughly 1.8, pretty reasonable for a growing company. Income was $103m, meaning the trailing price to earnings ratio is roughly 29, also reasonable given its growth prospects.4

Expectations for 2021 are $1.9bn in revenue, and income of $128m. This implies a forward revenue ratio of roughly 1.6, and a forward price to earnings ratio of roughly 23.5

In the current climate of tech, these ratios seem reasonable. Especially when considering the long-term growth outlook for demand in gaming peripherals and creator hardware.

Corsair also has a relatively healthy balance sheet. Over the last several years, Corsair’s debt to equity ratio has gotten gradually better, now at roughly 74%. This represents a significant degree of leverage, but it is encouraging to see it decreasing.

Both Corsair’s debt and interest coverage ratios are healthy, however. Free cash flow represents 52% of its debt, and their EBIT has 4.6x coverage on interest payments. Its short-term asset to short-term liability ratio is also above 1.6

Given their relatively healthy financial ratios, I think Corsair is primed to take advantage of the explosive growth in esports and gaming.

4 finance.yahoo.com/quote/CRSR/financials?p=CRSR.

5 simplywall.st/stocks/us/tech/nasdaq-crsr/corsair-gaming.

6 simplywall.st/stocks/us/tech/nasdaq-crsr/corsair-gaming.

Strategic

Corsair’s approach to acquisitions provides a healthy and sustainable growth strategy. Corsair has successfully expanded into a wide variety of components, peripherals, and accessories. They select companies for acquisition that offer a premium brand name and accompany their portfolio well.

The acquisition of SCUF gaming (manufacturer of controllers for both PC and consoles) in December of 2019 is a perfect example of this. It is a well-known brand that is perceived as high quality, and compliments Corsair’s existing line of products well. It extends Corsair’s reach into gaming without overlapping its existing products.

Integrating these divisions into existing supply chains and outsourcing manufacturing allows Corsair to maximize profitability.7

The general trust of stewardship to continue to make intelligent acquisitions is a key part of Corsair’s strategy. Long-term growth is enabled through these acquisitions and expansion into gaming and esports.

7 hanweiconsulting.com/2020/09/08/a-corsair-valuation-nasdaq-crsr/.

Risks

Given Corsair is primarily focused on manufacturing of goods, it isn’t a true tech company. This means that as it continues to scale, the operating margin will only improve slightly.

Loyalty among consumers could be a concern, as many gamers are concerned solely with specs and don’t adhere to any one brand.

Corsair’s degree of leverage could prove problematic if esports/gaming slows.

Trust of stewardship is of great importance, given Corsair’s emphasis on acquisitions to create growth. If management makes poor choices in acquisition targets, Corsair’s profitability and brand name could suffer.

Conclusion

Corsair is priced low considering it’s growth prospects and execution within the esports/gaming industry.

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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