When Corsair Gaming, Inc. (NASDAQ:CRSR) went public in September 2020, the market reception to the public offering was muted, despite a red-hot IPO market and great demand for gaming (and related equipment). Despite this soft market reaction, I was quite cautious on Corsair, although this caution was far too early with the benefit of hindsight.
What followed was a huge rally in 2021 but subsequent fall in 2022 and 2023, as shares now trade notably below the IPO price in 2020. This was seen while the business saw continued revenue growth, with the exception of a tough 2022, as the business has deleveraged and regained profitability. Given this, appeal is improving a lot, yet I am not yet willing to commit here given the low and cyclical margin profile.
Gaming, E-Sports And Streaming
Corsair has a mission to redefine the world of gaming, e-sports and streaming, offering a complete suite of products which are used by digital athletes, casual gamers and even professional gamers, and yes the latter is a real profession in this world.
Focusing on the higher end of the market, Corsair focusing on performance and innovation, with speed, precision and reliability being keen. After all, increased processing power is needed to keep up with graphics and the games itself. Actual products sold include game and creator peripherals (keyboards, headsets, controllers) as well as gaming components and systems such as cooling solutions and memory modules, among others.
Since its founding in 1998, the company has rapidly built up a reputation in an ever-growing global gaming industry, which at the time of the IPO was pegged at around $150 billion per annum.
The company went public at $17 per share, granting the company a $1.56 billion equity valuation based on a share count of 92 million shares, although that this valuation excluded a pro forma net debt load of around $270 million.
This valuation was applied to a business which doubled sales in a four-year window through 2019, with revenues reported at $1.1 billion. Despite this formidable revenue base, gross margins came in at levels in the low-20%, with operating profits of $24 million working down to margins of just 2% of sales, not leaving any room for substantial earnings.
With adjusted EBITDA posted at $71 million, leverage was actually a concern as well, as net debt was posted at $270 million. Of course, this was ahead of the pandemic as revenues grew 42% in the first half of 2020 to $689 million, as break-even results in the same period in 2019 turned into substantial profits.
My question was which kind of profitability would be sustainable. The pandemic would likely provide a boom to pay off debt, but the real question was what the normal earnings power of the business would be, making me cautious.
A Huge Boom – Bust
As it turned out, shares of Corsair essentially tripled to a high of $45 by the spring of 2021, marking huge gains for investors who bought into the public offering. By April 2022 shares had fallen and broke through the $20 mark, to trade in a $10-$20 range ever since, now exchanging hands near their lows at $12 per share.
The same trends are seen in the actual results as well. After 2020 saw a massive uplift due to the pandemic, the real boom was seen in 2021. Revenues that year were reported at $1.90 billion as strong growth made that gross margins rose to 27% of sales, resulting in operating earnings of nearly $138 million.
Revenues fell back to $1.38 billion in 2022, a 28% decline compared to the year before. Gross margins fell towards 21% of sales, as substantial GAAP operating profits in 2021 turned into a loss of $55 million. Moreover, despite the booming times, the shares count actually rose a bit to about 100 million shares by 2022, although net debt had come down to less than $100 million.
The company guided for stabilization, in fact slight growth in 2023, with sales seen between $1.35 and $1.55 billion. Adjusted EBITDA was seen between $90 and $110 million, which would be a great improvement from a $46 million number reported in 2022.
First quarter sales fell 7% to $354 million, although that margins actually improved a bit and the company stuck to its full year outlook. Second quarter sales rose by 14% to $325 million, again accompanied by strong margin performance. While GAAP operating profits were flattish for the first half of the year, note that this is somewhat a seasonal business of course.
In November, Corsair reported a 16% increase in third quarter sales to $363 million. Despite the stronger sales growth and pace of margin improvements has slowed, GAAP operating profits were reported at break-even levels.
The company essentially stuck to its full year outlook, but it narrowed the range, with full year sales now seen between $1.40 and $1.50 billion, with adjusted EBITDA seen between $95 and $105 million.
Putting this into perspective, year to date revenues came in at $1.04 billion, which reveals that seasonally strong fourth quarter sales are seen around $410 million. Adjusted EBITDA to date has been $63 million, and could come in around $100 million for the year, suggesting a strong $37 million number for the final quarter of the year.
Looking at this number, I am not happy to adjust for an annual $10 million interest expense, $12 million depreciation expense and $30 million in stock-based compensation expenses. This reveals realistic earnings at just around $50 million, which is equivalent to half a dollar, and such an earnings reversal is exactly what I feared that the time of the IPO, even as revenues have seen continued growth.
While net debt has come down quite a long way to $75 million and no longer is a great concern, I simply fail to see the great appeal in Corsair Gaming, Inc. shares. On the other hand, we have to recognize that the market value has shrunken to $1.2 billion here, or $1.3 billion including debt, which means that the business trades at less than 1 times sales. This results in a lower sales multiple amidst low leverage, but on the other hand is the lack of real margins, and stability of them.
Weighing it all together, now is the time to get upbeat on Corsair Gaming, Inc. shares rather than to turn downbeat, yet I fail to have conviction to get involved here just yet.