Corsair Gaming Deep Dive: Our Next Value Stock?

(Michael Vi)
(Michael Vi)
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The ROIC Discord channel asked Justin to take another look at Corsair (CRSR). The industry tailwinds and quick look at the company’s valuation were attractive to take a deep dive. Learn more about the gaming and streaming products company here!

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Overview

  • Corsair Gaming (CRSR) is a hardware company that provides gear for gamers and content creators.
  • The company designs and sells gaming and streaming peripherals, components, and systems globally.
  • Corsair’s product offering is enhanced by two proprietary software platforms that help provide unified, intuitive performance, and aesthetic control and customization across their respective platforms:
    • iCUE for gamers
    • Elgato’s streaming suite for content creators
  • Corsair’s products are grouped into two segments:
    • Gamer and creator peripherals
      • Keyboards
      • Mice
      • Headsets
      • Controllers
      • Capture cards
      • Stream decks
      • USB microphones
      • Studio accessories
      • EpocCam software
      • Coaching and training services
    • Gaming components and systems
      • Power supply units (PSUs)
      • Cooling solutions
      • Computer cases
      • DRAM modules
      • High-end prebuilt and custom-built PCs
  • Corsair believes its brand, scale, and global reach will provide a significant competitive advantage in the rapidly expanding gaming and streaming market.
  • Part of the company’s strategy is to acquire and integrate complementary brands and businesses into its portfolio. Since 2018, Corsair has completed six acquisitions.
    • Elgato in 2018 to enter the streaming gear market.
    • Origin PC in 2019 to offer custom-built gaming PCs.
    • SCUF Gaming in 2019 to enter the console gear marekt with a leading controllers brand.
    • EpocCam in 2020 to enhance the Elgato streaming camera software.
    • Gamer Sensei to offer gaming coaching services.
    • Visuals by Impulse in 2021 to provide creative services to streams.

Industry + Opportunity

Gaming

  • Gaming has evolved into the mainstream and has taken a central place in the global entertainment landscape.
  • There were an estimated 2.8 billion gamers worldwide access all devices spending more than $174 billion on game in 2020 according to Newzoo.
  • According to Activate Research, gaming today represents approximately 11% of all American consumer internet and media activity, surpassing activities such as social media and messaging.
  • There is increasing availability and variety of quality, interactive game content which Corsair believes will continue to fuel the gaming market’s expansion.

Content Creation

  • Digital content creation has democratized video-first communication and voice-chat being the norm among creators, viewer, and gamers.
  • There were over 40 million active gaming channels on YouTube in 2020 and over 27 billion live streaming hours watched across Twitch, Mixer, YouTube Gaming, and Facebook Gaming in 2020.
  • Beyond gaming, applications for streaming gear is growing for podcasting, video blogging, interactive fitness, remote learning, work-from-home, etc.

Market Opportunity

  • In 2019, the global gaming PC and streaming gear markets totaled approximately $36 billion according to Jon Peddie Research.
  • In 2019, there were an estimated 524 million PC gamers worldwide. Approximately 94 million of these gamers spent over $1,000 on their gaming PC systems.
  • As gaming and streaming continue to expand in the mainstream, casual gamers increasingly aspire to emulate streamers and seek to improve the production quality.

Q2 Highlights (August 3)

  • Net revenue of $472.9 million, an increase of 24.3% YoY
    • Gaming and creator peripherals segment: $155.2 million (40.9% YoY increase)
    • Gaming components and systems segment: $317.7 million (17.6% YoY increase)
  • Gross profit of $130.4 million (27.6% margin)
    • Gaming and creator peripherals segment: $54.6 million (35.2% margin)
    • Gaming components and systems segment: $75.7 million (23.8% margin)
  • Adjusted EBITDA of $51.6 million (10.9% margin).

Financial Outlook

  • Full year 2021 outlook remains the same from Q1 2021
  • Net revenue between $1.9 billion and $2.1 billion.
  • Adjusted operating income between $235 million and $255 million.
  • Adjusted EBITDA between $245 million and $265 million.

Management Commentary

Andrew Paul, Founder, CEO & Director

  • On impacts from the pandemic: “Our belief is that the situation in 2020 and early ’21, where gamers clearly spent more time in their homes, learning to play games better, that should establish a higher base of consumers ready to step up and upgrade their gaming setup, which includes peripherals as well as gaming PCs.”
  • On freight costs: “The cost of containers is prob 3-4x now what it was 2 years ago, and we certainly expect that’s going to be somewhat of a temporary situation, otherwise we’ll be starting up container companies”
  • On live streaming and self-broadcasting: “We’ve just doubled down [on live streaming/self broadcasting… biggest part of the TAM is the camera, and we jumped into that, close to $1B market TAM”
  • Supply constraints: “I think the biggest issue right now numerically is probably the lack of graphics cards that’s holding back the component market and stopping viewer burden PCs.”
  • On pricing: “We haven’t made any huge changes [to pricing]… the general sense is that we’re going to weather it for the next couple of quarters and so on until we see what the natural level is. But container prices are very elevated right now and this almost certainly would have to come down by the end of the year, if not before.”
  • On inventory: “There’s a steady increase in inventory, but certainly, i would say not yet at targets for the products that we really make a difference in market share.”

Financials + Valuation

  • At the mid-point for Corsair’s revenue outlook, the company would be growing 17.5% year-over-year.
  • Analyst estimates expect growth to slow to just over 5% in 2022 as some gaming and streaming purchases have been pulled forward due to the continuation of the pandemic in 2021 and will create tough comps moving forward.
  • At 25.77 per share, Corsair is trading at a $2.55B enterprise value.
  • On a forward basis, CRSR is trading ~9.5x adjusted EBITDA.

DCF Valuation Analysis

JO:

Growth: I’ve assumed revenue growth of 10% scaling down to 3% over the next 10 years, something that should be very achievable. The biggest questions are around the semiconductor and shipping shortages, tough Covid comps, and how fast gaming and creator tools grow in the next decade, which may cause short-term choppiness in the stock price

Margins: After reading two transcripts, it looks like low-teens margins are more in line with what they want. I’ve assumed long-term margins around where they are now, although this should conceptually improve as they offer more differentiated and value-add products.

As a result, I’m getting a fair value of ~$35 per share.

ICMYI: Revisit Justin’s First Look at Corsair in June

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