Corsair Gaming $CRSR reported earnings on the 5th of May. Today, I’ll be going over the earnings and give my thoughts on the prospects of the company and the industry.
The stock price of Corsair has only been dropping since last year. Which was only reasonable given the high valuation of the stock in the beginning of 2021. A stock price of 40 to 50 bucks was just way too much for earnings that were not sustainable. But we have now come to a point were this company looks a bit cheap given the upcoming tailwinds.
First of all, it is important to understand that Corsair is not the only stock that is dropping heavily at the moment. If we look in the same industry, we can find a company like Logitech. Logitech dropped 56% from peak to bottom. Logitech is by far the leader in the industry and is carrying the same kind of volatility as Corsair.
Another stock that we can look at in the gaming industry is Turtle Beach. Similar to Corsair and Logitech the stock dropped 56%. We can clearly see that the gaming industry as a whole ran up a bit too much and has come back down.
The sales of these companies have been slowing or even declining in the latest quarters. Of course, that is not very unreasonable given the crazy years we had in 2020 and 2021 for the gaming industry due to COVID-19 lockdowns. So, stagnation in revenue was highly predictable. But now we also suffer from supply chain issues what gives struggles on the profitability side of these companies. If we look at the results of Corsair for a second, we can see they missed both revenue and earnings estimates. Corsair did $380mil in revenue and $0,09 earnings per share. This was a revenue decline of 28% year over year, but an increase of 23% compared to pre-pandemic first quarter of 2020. So overall not too bad given the circumstances.
Now you have to ask yourself, will these problems last forever? My guess is no. I think these are short term problems. Although it is important to understand, that predicting the end of these problems is very hard to do. Because there are so many things involved like: a war, supply chain issues, high freight costs, COVID-19 lockdowns in China, high inflation and many more. So don’t expect Corsair to beat earnings anytime soon.
If we look at the revenue by geographic location, we can even see that Europe has been the real problem. The numbers don’t lie. Europe has probably been hit the most with the effects of the war and people want to spend less money now. On top of that GPU prices have been very high too. Which makes it less attractive to build a new pc.
So we got the bad things out of the way. There are some very important tailwinds for Corsair to consider.
The risk reward balance has been growing into our favor as the stock price has been dropping. The valuation of Corsair seems rather fair to undervalued right now. Corsair’s price to earnings ratio is similar to the sector median. What is more interesting is that fact that Corsair is trading at a price to sales of only 0.84. This means the revenue of 1 year is higher than the current market cap of the company. So as the gross margin go back to normal levels, we can see some big changes into the price to earnings ratio.
The CFO also mentioned that this quarter was probably the peak of the high freight costs and that gross margins will improve in the second half of the year. This means higher earnings as a result and a better valuation for the stock. So very positive news.
GPU prices declining is the next positive catalyst. GPU prices are coming down to their MSRP. Corsair can benefit from this when computer building will increase again. Intel is also entering the GPU market this summer with their ARC graphics card. Higher competition will give us even lower GPU prices.
Another thing I want to mention is the effectiveness of Corsair’s acquisitions. It’s pretty crazy how quickly Corsair is building out their moat in the gaming space. I recently upgraded my pc and choose a lot of products from Corsair. Mostly because the quality of the products is extremely high. Next to that, you can also connect and control all your products on one free software named iCUE. In this software I can manage the lighting of my products and even check out the temperature of my GPU and CPU. Which is pretty awesome.
Overall, the gaming market is still expected to grow year of year. If Corsair can increase their market share in Asia, then a lot of growth is still ahead. Corsair has a strong position at the moment and won’t lose it easily as their ecosystem is already very advanced compared to competitors.
I’ve been buying Corsair stock on a regular basis under a share price of $30. I expect Corsair to grow towards to 3 to 5 billion market cap in the following 5 years. 2022 will be a tough year but it should ease after that.
A lazy reader? Check out my video now: Gaming Stocks Out of Flavor, Should You Buy Now? | Corsair Gaming Analysis - YouTube
DISCLAIMER: I do own shares of Corsair Gaming. I am not a financial advisor. Investing is your own responsibility. I am not accountable for any of your losses.