A comprehensive analysis of Corsair Gaming | $CRSR
Not financial advice, do your own research, blah blah blah
This is a bit of a long winded one, and is my first DD, hope you like it
Disclosure: I have a long position on Corsair Gaming Inc | $CRSR
Corsair Gaming, Inc. designs and sells gaming and streaming peripherals, components, and systems. The Company's gaming and streaming gear enables creators to produce studio-quality content. Corsair Gaming serves customers worldwide. The company offers gamer and creator peripherals, including gaming keyboards, mice, headsets, and controllers, as well as capture cards, stream decks, USB microphones, studio accessories, and EpocCam software. It also provides gaming components and systems comprising power supply units, cooling solutions, computer cases, and DRAM modules, as well as pre-built and custom-built gaming PCs, and others; and PC gaming software comprising iCUE for gamers and Elgato's streaming suite for content creators. In addition, the company offers coaching and training, and other services. It sells its products through a network of distributors and retailers, including online retailers, as well as directly to consumers through its websites.
The company filed to go public on August 21st 2020, and presented the following prospectus summary within their S-1 filing;
“We are a leading global provider and innovator of high-performance gear for gamers and content creators. Our industry-leading gaming gear helps digital athletes, from casual gamers to committed professionals, to perform at their peak across PC or console platforms, and our streaming gear enables creators to produce studio-quality content to share with friends or to broadcast to millions of fans. We design and sell high-performance gaming and streaming peripherals, components and systems to enthusiasts globally.
We have served the market for over two decades and many of our products maintain a number one U.S. market share position, according to data from NPD Group and internal estimates. We have built a passionate base of loyal customers due to our brand authenticity and reputation as providers of innovative and finely engineered products that deliver an uncompromising level of performance.
Competitive gaming rewards speed, precision and reliability. As in other sports, specialized high-performance gear such as gaming mice, keyboards, headsets and performance controllers allow digital athletes to perform at their best. Modern games also require significant processing power to render high-resolution graphics, and reward the speed and precision of user inputs, driving demand for powerful gaming components and systems. Further, in a world where the ability to create content is democratized and competition for viewer engagement is greater than ever, content creators, particularly streamers, are increasingly seeking ways to maximize the quality of their video capture and broadcasting, which requires specialized high-performance gear.
Our solution is the most complete suite of gear among our major competitors, and addresses the most critical components for both game performance and streaming. Our product offering is enhanced by our two proprietary software platforms: iCUE for gamers and Elgato's streaming suite for content creators. These software platforms provide unified, intuitive performance, and aesthetic control and customization across their respective product families. We group our gear into two categories:
We believe our brand, scale and global reach provide significant competitive advantages. As of June 30, 2020, we had shipped over 190 million gaming and streaming products since 1998, with over 85 million in the past five years. Our gear is sold to end users in more than 75 countries, primarily through online and brick-and-mortar retailers, including leading global retailers such as Amazon and Best Buy, and through our direct online channel. Due to our gamer and creator-centric design philosophy we have received over 4,000 product awards from magazines and websites in approximately 45 countries since 2016, of which more than 3,500 were ‘Gold,' ‘Editor's Choice,' ‘Approved,' or similar awards, including multiple perfect ‘10 out of 10' or similar perfect ratings.
We believe our brand, market position and operational excellence will allow us to continue to capture a growing share of the rapidly expanding gaming and streaming gear market, estimated at over $36 billion in 2019 by Jon Peddie Research. We intend to continue to grow by offering market-leading gear to gamers and content creators, expanding the breadth of our product suite to meet the needs of our customers, growing our worldwide market share, continuing to invest in marketing, product innovation and sales, and selectively pursuing accretive acquisitions.”
The Corsair business model has proven to be very sustainable over the past two decades and has grown in tandem with the fruition of the gaming industry. I believe Corsair Gaming's public stock ($CRSR) is severely undervalued at current market prices for the present value of the business, and I also believe the business is poised for massive growth in the coming years.
To start off, I propose to you a question. If you had to choose five industries that are going to grow like crazy over the next ten years, which would you pick? You might pick cloud, transportation, AI, data, energy, so on and so forth. But, would you ever choose gaming? Probably not, and those who would would likely not be taken seriously by those on Wall St, but I truly believe that gaming belongs in the aforementioned category. Let's say we go back just over twenty years and tell the fine folks of that time what video games are going to become in the future. They would be unable to comprehend the advanced and complex nature of games today versus games then, the difference is night and day. Most of gamers here today I'm fairly confident do not remember these times in terms of gaming, with a lot of us not even being alive, but as I understand it, gaming used to be in the malls and in the arcades, where you would take grandpa's money and go and play on the arcade machines all day, think Pac-Man, Space Invaders, Asteroids, Frogger, you get the idea. After a while we had Atari releasing their brand new idea of home gaming systems, by bringing consoles inside your living room, then we had PC's and the original versions of the current brand name consoles a while after that, and now we are living through the next whole cycle, with the power of the internet and how broadband infrastructure has been getting better along with the increase in hardware performance and capability, even for casual gamers, now we have this combination. Now that we have went through the social media stage of modern life and how well it has settled, gaming is starting to play a major role in social media, and a lot of younger people now will prefer and opt to hang out with their buddies, even with people they've never met before from across the globe, through video games and related platforms. I know that to some that statement seems crazy, and to others, perhaps more like minded with myself, totally obvious and old news, so routine as to not even warrant talking about. Regardless with which side of this fence you land on, this is the way modern entertainment is headed, and we haven't even scratched the surface of how insane this is going to be as a platform to drive sales and eCommerce, a lot of business is going to flow through the gaming industry in a ballistic fashion. If you don't agree that's fine, but I personally see gaming as one of the biggest industries of the 2030's, god knows it's proven it can grow so far.
As some of you may already know, Corsair is not a game developer or publisher, they make hardware and components for gaming. And they're really good at it too. They hold a 28% interest in the PC Gaming market, with leading products in all sub sectors from cooling solutions, to PC cases, to Power Supply's, in a lot of categories you can think of they probably lead it. The $2 Billion in sales they are doing right now is going to look like nothing compared to the prospective size of market that they are going to be operating in in the 2030's. Popular estimations set the industry value as a whole to multiply 7 times over from now till 2030, and I think the current revenue of $2 Billion a year is going to be a drop in the ocean of the future revenue streams of the company.
As you can see here, the stock is down 26.45% YTD as of the 29th of September 2021, with the stock down 48.45% from its ATH of $51.37 on the 24th of November 2020. The stock has an astoundingly high short interest, sitting at 29% short. This does not make any rational sense at all, as the business fundamentals are totally solid.
I want you to look at the revenues to make a very important point to begin with;
It should be seen clearly here and now that revenue growth has not been entirely fuelled by COVID, as many Corsair short sellers may have you believe. It takes a glance at the income statements to see that even before the early months of 2020 revenue was growing at a CAGR of 19.84%. With periods December 2010 - December 2019. There is definitely correlation to COVID as an accelerant to the growth, but it only serves as an amplifier, not as a creator of industries. It only amplifies processes that were going to happen anyway, so there is nothing concerning about this. As you can see the revenue numbers and the EBITDA figures are very impressive for this company;
Now let's take a look at the balance sheet, I would've linked it but AutoMod got angry at me for that. You can find it yourself on Seeking Alpha or Yahoo Finance.
$135 Million in cash, total assets of $1.378 Billion, discounted for goodwill that gets you $1.064 Billion. Comparing that against the total liabilities of $849 Million means the assets to liabilities ratio is positive. If we neutralize cash, we're getting $135 Million in net debt which isn't much for this company with $2 Billion in annual sales.
Now going to multiples, the story only gets better. GAAP TTM P/E is at 17, well below the sector median of 32 and representing a 47% undervaluation, and a GAAP FWD P/E of 18.7, again below the sector median of 29.1 and representing an undervaluation of 35.87%, TTM EV/Sales is at 1.4 as opposed to the sector median at 4.48 representing an undervaluation of 68.83%, TTM EV/EBITDA is at 10.9 as opposed to the sector median of 18.5 representing an undervaluation of 41.04%, and TTM P/S is at 1.2, below the sector median of 4.20 representing an undervaluation of 71.58%, you get the point. The multiples are really cheap, however I cannot find one good reason for this. They have a TTM gross profit margin of 28.5%, a TTM EBITDA margin of 12.8% and a TTM net income margin of 7.6%, which are not by any means stellar numbers, but they are pretty decent for a manufacturing company, and especially do not warrant a 30% short interest and a 53% undervaluation according to the average undervaluation of the multiples listed above.
The top 5 analysts covering Corsair on TipRanks all have a bullish price target with an average price target of $44.40, representing an upside of 68% from today's price. This sounds good on its own, but I personally think these guys are lowballing this stock, I think it could be worth a lot more than that in the coming years. For this I refer to my own discounted cash flow analysis, which should have come along with this document, but if not you can always follow the above link. Long story short, my DCF yields a price target of $55.48 (subject to change dependent on the spreadsheets input variables). I have strong conviction in a $50 PT, and do believe $55 is very achievable.
The whole play here for me is the fact that institutions seem to have had a field day shorting this company (I should mention that while I do recognize the possibility of a short squeeze, I do not expect one and am not trying to capitalize on that possibility) under the guise of ‘well the revenues are only increasing because of COVID' and all of Wall St hasn't bothered to pay attention to the absurdly small valuation of the company. The “Video Games? Pffft. How could they make any money with their silly products for children?” attitude is what I'm talking about, the ignorance of out of touch analysts and HF managers to recognize the growth of a newfangled snazzy industry.
There are two main risks I have identified with Corsair's stock. Of the risks, one relates to Corsair's business model, and the other relates to technical factors with the stock itself.
The first main risk relating to Corsair's business model, is the supposed threat of cloud gaming. First of all, if there is a meteoric rise in cloud gaming, it will hurt Corsair directly by taking market share from them in the gaming components and systems aspect of their business. The less people who need to buy components for gaming PC's and opt for cloud gaming instead as their internet speed justifies the change, the less people are buying Corsair products. That being said, I think some analysts overestimate the impact of cloud gaming on Corsair's business as a whole. Corsair sells more than just components of gaming PC's, they sell peripherals, which gamers still need regardless of platform, they sell proprietary streaming devices which streamers are still going to need regardless of platform. That's all assuming cloud gaming takes off in the first place, honestly I don't see it happening but I can't really speak on it too much, not going to be ruling it out as a risk I just don't think that even in the worst case it is not business ending for Corsair like some people are saying.
The other risk, if you could call it that, is EagleTree. EagleTree Capital is a private equity firm who acquired a controlling interest in Corsair in July 2017 before the company went public, with a valuation of $525 Million. This put EagleTree at ~92% ownership holding 77.8 million shares at a price of ~$6.20. Now this is the part I think a lot of investors don't know about or understand. EagleTree as I understand it is rumored amongst $CRSR investors to be aiming to reduce their share position over the coming years until they only hold 10% of the company. Currently, they own ~57.76% of the company, and as such must sell at least another 47.76% of the company. This amounts to them having to sell another 44,803,656 shares as of the 30th of September 2021. They last sold shares on the 15th of June 2021, selling 432,989 shares. The earliest trade from EagleTree is dated 09/22/2020, since then the trades by EagleTree of $CRSR are as follows;
As you can see, they've been selling off quite aggressively going from a 92% ownership to 59.28% in 266 calendar days, or 8 months and 23 days, or just shy of three quarters. Continuing at this rate, I calculate EagleTree should reach their 10% threshold on the 20th of July 2022, or exactly 400 days from 06/15/2021, 294 days from the writing of this report. My actual expectations are that it should be done by September 2022, and this will lift a significant amount of selling pressure from the stock. Take a look at this chart;
This is Corsair price chart since IPO up until 09/29/2021. The red lines show all the days on which EagleTree has sold shares. The past 3 out of the six sales seem to have been prempting or perhaps have caused a decline in share price. Regardless, lots of sell orders on the books, especially of this magnitude, are never good for a stock price.
I believe we have stumbled across a very good value play here, the only question is that if all this is correct and nothing has been missed, why hasn't the efficient market hypothesis beaten us all to it? Why isn't the stock trading at $55? There is talk of two things amongst Corsair investors, one being market manipulation, because let's be honest when anything isn't going your way it's got to be market manipulation, and the other is that there is very little retail investor interest compared to the amount of net sellers. The second point kind of holds up, the stock never did really get picked up by retail, and the sentiment on WSB and other forms is generally bullish, but with very low levels of interest in the play. Perhaps that speaks more to the patience and attention spans of redditors than anything else. Those who are dedicated to the long term play have voiced their content with sitting and stagnating prices and amassing shares until what they discern to be a fair value is realized.