Ivan Pantic
Thesis
Corsair Gaming, Inc. (NASDAQ:CRSR)is a leader in the DIY computer gaming hardware sector and is positioned to capitalize on favorable trends in the gaming industry, especially in streaming and eSports. The company offers investors an opportunity to benefit from gaming’s growth without the unpredictability associated with traditional game publishers. However, in the near-term, I anticipate Corsair’s revenue growth to be somewhat uncertain due to the cyclical nature of the three-year PC components cycle, which resembles trends seen in the console market. Corsair’s overarching strategy is to maintain relatively steady or slightly improving EBITDA margins over the long term. While one might anticipate margin expansion given the company’s emphasis on a Direct-to-Consumer approach and the profitability of the peripheral category surpassing other segments, the advantages of the DTC initiative will take time to materialize. The stock is trading at a higher multiple compared to peers, and hence, I remain cautious for now and assign a hold rating to the stock.
Company Overview
Corsair operates in a sizable TAM of about 1.8 billion PC gamers comprised of recreational, competitive and elite gamers. By focusing on the highest-priced tiers, Corsair’s TAM is competitive and elite gamers who spend >$1,000 on their PC systems and represent significant spending power. Corsair is the number one player in all key component categories, which include high-performance memory, cases, power supply units and cooling systems. Peripherals is Corsair’s fastest-growing and highest-margin vertical, and they are the number two player in keyboards, number two in streaming gear and performance controllers, number three in mice and number four in gaming headsets.
Q2 Result Review and Outlook
Corsair Gaming reported revenue slightly higher than the market expected, while the EBITDA came slightly lower than expected. However, the company maintained its guidance intact for the fiscal year 2023. CRSR’s recent acquisition of Drop also serves as a potential catalyst for optimism similar to the company’s successful acquisition of Elgato five years ago, which significantly boosted revenue. I believe that competitive pricing pressures seem to be easing, allowing CRSR to regain market share, notably on Prime Day where it outperformed sales in almost all product categories. This positive momentum is expected to continue into the second half of the year, with the introduction of new flagship products and the release of highly anticipated games like Starfield and a new Counter Strike.
On the other hand, Peripherals segment’s revenue and gross profit fell short of market expectations. However, there is an upward trend in the peripherals segment as discounts become less prominent, and the second half of the year promises numerous new product launches. However, it is worth noting that CRSR expected discounting to be light in 2Q as it is a seasonally weak quarter, so it remains to be seen whether lower promotional pressures will persist moving forward.
The Market Leader In Most of Its Product Categories
At its core, Corsair caters to tech-savvy serious gamers passionate about their computer’s speed and who prefer to build their PC from scratch due to unmatched customisation and performance. In an industry where gamers only recognise a brand’s superiority for a specific type of product, CRSR thrives by being one of the only companies able to create products that are sought after by all gamers spanning both the peripherals and components sectors. With best-in-class products, a strong desirable brand and the ability to make strategic acquisitions, Corsair has created a defensive moat that has been able to grow its US market share in the components and memory segment to 45% and 73% in 2Q23 from 40% and ~55% respectively.
One of the most compelling reasons to own CRSR is that the company is the number one manufacturer in the PC components sector, and in peripherals it is number one in keyboards and number two in streaming peripherals and performance controllers. The segment is benefiting from Covid-19 tailwinds as kids and young adults search for hobbies to entertain themselves just a couple years after having benefited from a large wave of new gamers from Fortnite. By focusing on creating and releasing premium products monthly, with no reported desire to move down-channel to more affordable price points, CRSR should continue to solidify its best-in-class brand. By not compromising on price and only focusing on making a superior product compared to its peers, Corsair has successfully grown its keyboard market share to 2nd biggest in the US, mice market share to 3rd biggest, and headset market share to 4th biggest in the country.
Company Presentation
Expanding TAM As Gaming Becomes More Social
There are over 1.8 billion PC gamers globally, and over the past few years there has been a significant on-boarding of more casual social gamers brought on from Fortnite. Corsair has been benefiting from macro tailwinds as the gamer TAM continues to expand from the popularity of Fortnite driving people into competitive gaming. Additionally, Covid-19 expanded the TAM as people search for ways to entertain themselves as social distancing continues to drive isolation. With all these new casual gamers, I believe a subset of them will eventually start to notice the limitations of their current setup and graduate into becoming a competitive gamer that spends between $1,000 and $1,800 on setups with better keyboards, mice, headsets and other different PC setups. All the new gamers entering into the funnel and starting to upgrade their setups is driving significant peripheral growth at Corsair and shifting its mix away from lower-margin products, such as performance memory, to the highest-margin peripheral vertical.
Valuation
In the near term, I believe CRSR’s top-line growth story will be a little muddy from the boom and bust of the three-year PC components cycle, which is similar to consoles. Fortnite in 2018 and 2019 and Covid-19 in 2020 helped drive outsized growth. However, I expect in the three years following its IPO, Corsair will potentially see a sharp deceleration due to the natural components cycle. Corsair’s long-term strategy involves maintaining relatively stable or slightly increasing EBITDA margins. While one might expect margins to rise given their push towards a Direct-to-Consumer (DTC) approach and the high-margin peripheral category outpacing other segments, the benefits of the DTC initiative will take time, and ongoing R&D investment to stay competitive may keep long-term margins relatively flat.
I believe that Corsair should be compared against a group consisting of three categories: i) peers in the peripherals market, ii) consumer hardware peers with similar growth rates, and iii) other gaming companies poised for sustained growth due to the increasing popularity of gaming as a hobby. I have shown a peer comparison of CRSR’s Forward EV/EBITDA relative to its peers. The stock trades in-line with its closest competitor Logitech International S.A. (LOGI). However, I believe that Logitech merits a premium valuation relative to CRSR due to its established track record, higher historical multiples. Hence with CRSR’s stock trading at a high valuation and no upside catalysts in the near term, I believe the risk/reward is pretty balanced at the moment with the downside scenario including encompassing the instability of its memory business and the likelihood of EBITDA margins remaining stable or decreasing in the short term, primarily because of ongoing investments in research and development and sales and marketing efforts by the company driven by intense competition. Hence, I remain cautious and assign a hold rating to the stock for now.
YCharts
Risks to Downside
Corsair has traditionally driven sales growth through the rapid introduction of new products rather than by significantly increasing sales of existing ones. This approach is expected to put pressure on long-term margins as the company continues to invest heavily in R&D. It’s anticipated that operating expenses as a percentage of sales will increase despite growing revenue due to Corsair’s investments in creating new products and expanding marketing efforts in areas like influencers, eSports, and the DTC initiative. Moreover, the gaming peripherals and components market is highly competitive, with Corsair, Logitech, Razer, and others vying for market share. Corsair is positioned in the middle in terms of pricing compared to its major competitors but has fewer product variations available through prominent brick-and-mortar retailers like Best Buy. In contrast, Logitech covers a broader pricing spectrum, targeting both entry-level and premium segments, giving it the flexibility to attract and grow with gamers at various budget levels.
Conclusion
Corsair Gaming has been benefiting from the gaming industry’s positive trends, especially in streaming and eSports. However, near-term revenue growth may be uncertain due to the cyclical nature of the PC components market. Corsair’s long-term strategy aims for stable or slightly improving EBITDA margins, although immediate margin expansion may be limited as the benefits of their Direct-to-Consumer approach and profitable peripheral category take time to materialize. The stock’s current valuation compared to peers warrants caution, leading to my hold rating on the stock.
