Corsair Gaming Inc. (CRSR, Financial) hasn’t been a public company for very long. A well-known and reputable name in the PC gaming industry for more than 25 years, Corsair made its public debut on Sept. 23, 2020, with shares initially priced at $15 apiece.
The stock initially shot up, surpassing $50 toward the end of 2020 as investors were enthusiastic about anything related to the words “stay at home.” Corsair’s high-performance PC components and peripherals fit the bill, as did its streaming equipment and smart ambient lighting.
However, enthusiasm for the stock soon waned as short-term traders began selling some of their “pandemic stocks” and insiders began exercising their options and dumping their shares on the open market. Supply chain issues have also put pressure on the stock’s valuation, as many analysts are worried about the short-term impact these backlogs will have on revenue.
These short-term headwinds have provided a rare entry point to a fast-growing company with strong fundamentals that should benefit from pent-up demand when supply chain issues begin to resolve.
Setting a course for growth
For full-year 2020, Corsair reported revenue of $1.7 billion and net income of $103.2 million. It held the number one spot in the PC components industry with 41.9% of the total market share, while its share of the peripherals market was a relatively modest 18.3%.
As of the second quarter’s end, the company’s trailing 12-month revenue stood at $2.0 billion, representing 17% growth, while trailing 12-month net income was $153.9 million, up 48% from half a year ago.
In its preliminary results for the third quarter of 2021, Corsair estimated that full-year 2021 revenue would be somewhere in the range of $1.825 billion to $1.925 billion, the midpoint of which would put the company at 10% year-over-year growth. These estimates disappointed investors, causing the stock price to drop further as the company explained that supply chain issues would weigh on its results.
According to CEO Andy Paul, "we believe that our 2021 net revenue has been held back at least 10% by global logistics and supply chain issues," particularly involving the lack of affordable graphics processing units.
The chip shortage is making it difficult for gamers to get their hands on the latest graphics cards from Nvidia (NVDA, Financial) and Advanced Micro Devices (AMD, Financial), which is putting pressure on Corsair’s gaming and components segment. It is common to plan PC builds and upgrades around acquiring a new graphics card, so without new graphics cards, some gamers are unable to make upgrades.
Corsair is not letting the supply shortage hinder its development of new products. The company fully expects discouraged buyers to come back to the market once supply shortages begin to resolve, which should unlock pent-up demand for its offerings.
In the long run, the number of gamers is expected to reach 3.3 billion by 2024, compared to 2.6 billion in 2019 according to market researcher Newzoo. Live streaming of games is also shaping up to be a growing trend that will extend beyond the pandemic, with Twitch breaking viewership records for the third time in a row in the second quarter.
The delayed upgrade cycle for console gaming systems is also set to increase demand for gaming accessories in the future. Sony's (SONY, Financial) PlayStation 5 and Microsoft's (MSFT, Financial) Xbox Series X remain consistently out of stock, so the majority of console gamers have been forced to stick with older consoles or find different games to play. Once next-gen consoles become widely available, the interrupted upgrade cycle can get back underway.
Demand outweighs supply – for now
Currently, one of the biggest pressures weighing on both Corsair’s revenue and its stock is the ongoing supply chain issues, especially in the semiconductors industry.
Following the company’s updates to its full-year 2021 guidance, several analysts on Wall Street downgraded or reduced their price targets for the stock, citing that supply chain issues with GPUs could permanently hurt demand for video games and related goods.
The reality right now is that demand for video games is outweighing supply. This is part of what’s led to the boom in popularity of video game streaming; those who can’t get their hands on the latest consoles or GPUs can watch other gamers stream.
However, that doesn’t mean that this situation is going to persist forever. Where there’s demand, there’s typically going to be some company (likely multiple companies) stepping up to meet that demand. When supply of other products begins to catch up with demand, Corsair will still be there to provide cutting-edge gaming components, peripherals and accessories, likely benefitting from pent-up demand as well.
In addition to driving sales, the resolution of supply chain issues could also lead to investors assigning the company higher valuation multiples. We can see echoes of this in how analysts are downgrading the company due to missing expectations; if it were to surpass expectations in the future, people could even be willing to pay more than the stock is worth in the hopes of benefitting from growth.
Valuation
At a price-earnings ratio of 15.72, Corsair is cheaper than 60% of peers in the hardware industry, despite sporting a return on capital of 191.33%, which surpasses 97% of other names in the industry. The company’s top and bottom lines rose steadily throughout 2020 before beginning to come down in 2021. It should be noted that with most consumer electronics companies, earnings tend to be higher in the second half of the year.
The stock seems to be fairly valued at the moment compared to its earnings, which is rare for a growing tech stock these days. The price is only slightly above its fair value according to the Peter Lynch chart, and it is trading below its historical median valuation.
While missing analysts' expectations could cause the share price to drop further, the company also expects to record year-over-year growth, which should help keep the stock from plunging too much.
Conclusion
The gaming industry overall is suffering from demand outpacing supply, and once more customers are able to upgrade their systems and buy new consoles again, all of Corsair’s key markets stand to benefit.
While some analysts fear that supply chain issues will cause a permanent cooldown in demand for video games, I believe this scenario isn’t likely to come to pass unless supply chain issues turn out to be permanent and drive the price of consoles, GPUs and components out of the retail price range. Even if some of the growing demand is destroyed by lack of instant gratification, this could be somewhat mitigated by Corsair’s streaming peripherals.
Some of Wall Street’s hesitation on the stock could also be due simply to generational differences, specifically the fact that video games are a lot more popular with younger generations, often taking the place of things like watching sports games or TV shows. Regarding this topic, Paul had the following to say when the company went public:
"We're already waiting for Wall Street investors to understand gaming and streaming properly. Some of these new industries... are tough for investors to understand…
Perhaps people saw gamers as sort of a troubled teenager playing games in the basement. It's a real sport... it's become mainstream and we understand this is a great time to finally become a public company."
With a price-earnings ratio of less than 20, a solid history of earnings generation, good growth numbers and higher growth expected in the future as supply chain issues eventually resolve in the semiconductor industry, Corsair seems like a rare undervalued gem.
