Corsair Gaming: Growth at a Reasonable Price?

Its impossible to argue Corsair (CRSR) wasn’t significantly boosted by historically loose economic policy and global periodic lockdowns.

I’ve followed Corsair for several years and have passed on the opportunity to invest on several occasions. Now that Corsair shares are back to IPO price levels in the mid-low teens, it makes sense to consider the opportunity as the valuation reaches $1.4 billion.

Analysts estimate a -9.6% decrease in top-line revenue in FY22 – this was previously guided to be 6.9%+. With the downgrade and poor macro backdrop, many investors have departed and shorts have captured significant profits over the last few quarters. Corsair is still highly shorted as 10.5% of outstanding shares remain shorted. The latest short interest report will be published on the 9th of June for the period ending May 31st.

Corsair’s PE owner and CEO have sold large volumes of stock over the last two years. However I believe larger shareholders knew this was a perfect opportunity to reduce ownership, as the market was pricing highly optimistic growth. Corsair operates in a thematic space (a growing TAM) which is potentially why Corsair insiders didn’t reduce their ownership to 0% when the company reached a valuation over $4.7B in 2020.

Down at $15 per share, lot of risk has been priced in and Corsair’s valuation is significantly more attractive which is why an independent board member recently purchased over $1 million worth of stock this month.

Supply Issues and Consumer Sentiment

Higher prices (GPUs/CPUs) has forced gamers to hold back on purchases, according to management. As Corsair is a small retailer, they have also struggled to secure freight space on container ships as larger manufactures have significantly more bargaining power with shipping contractors. Therefore, not only is Corsair paying higher freight costs (containers) but it’s also fighting to secure container space on the ships which are already facing port and loading delays.

Semiconductors are still selling for over MSRP, however, in its most recent call, management said that they expect an equilibrium in pricing this year as supply slowly catches up. Management has begun raising prices across multiple components, but not so much in their peripherals portfolio as the market is more sensitive to these products. It’s hard to pass cost onto the end user without seeing it impact demand, especially at a time where living costs are rising and consumer confidence is decreasing. 

Typically, consumers save more and spend less as consumer confidence decreases. However, so far U.S. consumers are still spending, and on the surface, the U.S. economy seems fine as manufacturing PMIs remain positive. Nonetheless, going forward, investors should monitor U.S. consumer health just as much as they do with Corsair financials and forward guidance.

Growing Market and Margin Potential

Corsair is currently a market leader in gaming components and is well positioned to take advantage of the growing gaming market. Many experts argue the increase in gaming demand during the pandemic was a step function for the market rather than a one-off. The IMARC Group suggests a 6% annual growth into 2026 for the gaming peripherals market. Business Wire forecasts 7.4% annual growth into 2025 for the gaming PC and monitor market. With high end PC gaming on the rise, Corsair is well-positioned to capture the market with already more than a 50% market share.

Elgato streaming products and software have been key in supporting revenue. The segment is expected to maintain strong double digit growth over the next five years, being a key growth driver for the firm. Corsair’s family of gaming brands positions them well as a high quality gaming provider, one which appeals to professional gamers and growing base of gaming enthusiasts.

In FY21 over 26% of net revenues came from sales on Amazon (AMZN), which could have commissions between 6-14%. If management can successfully utilize a distribution network where they sell 100% direct-to-consumer, they can easily add a 200+ basis points to the bottom line. Going solely direct-to-consumer is a tall order with such a diverse product portfolio, but if it can be done without impacting demand, then thats additional cashflow to the bottom line.

I understand doing this is almost impossible with Amazon, however, with high-end products its more achievable if brands like Vans and The North Face do not sell through Amazon. Otherwise, would management be comfortable giving up 26% revenue so they can have slightly better margins? I think not. 

Valuation & DCF

Corsair currently trades at an EV/EBITDA of 15.2x (LTM) and has a forward (NTM) EV/EBITDA of 12.6x. To demonstrate the potential deviation in earnings guidance from Wall Street, last year analysts expected $225m in EBITDA in FY22. Now analysts expect EBITDA in FY22 to be around $124m. Management themselves are guiding $110-130m in EBITDA this year.

For the model below, I’ve used analysts EBIT estimates for FY22 and FY23. Thereafter I use various EBIT CAGRs into FY26 (4%/6%/8%/10%). In the example below I using 7% EBIT growth for FY23-FY26.

Image created by the author

Additional assumptions: 

– EV/EBITDA exit multiple – 13x 

– Perpetual growth rate – 2%

– WACC (discount factor) – 14% (high as a result of Beta increasing to 1.7)

– Effective tax rate – 22% 

– Share count (fully diluted) – 95,280,000 

Potential intrinsic value based on assumptions:

Image created by the author

This is a rudimentary exercise as the model is not greatly reliable due to high variations in guidance, for example EBITDA forecasts for FY22 are almost 50% lower from last year.

Nonetheless, the chart above illustrates potential intrinsic value as growth and discount factor varies. It’s difficult to forecast Corsair’s performance as there isn’t a long history of financials, and they IPO’d during an economic anomaly. If there’s a downgrade due to slower growth over the coming quarters, based on the model assumptions Corsair could be valued in the low teens.

Wall Street’s Take

Of the eight analysts covering Corsair, there are five Buy and three Hold ratings, resulting in a Strong Buy consensus rating. The average price target of Corsair Gaming is $21.88, which implies 45.77% upside potential from current levels.

Conclusion: Sitting on the Fence 

While Corsair seems fairly valued, if I was to use a larger margin of safety in my calculation (lower multiple/lower D&A add back) Corsair’s intrinsic value per share would certainly be much lower. Although I think Corsair is priced accordingly based on todays guidance, any small revision to estimates would most likely be received negatively by the market.

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