Corsair: Is it a buy?
Opdateret: 3. maj 2022
I see many elite popular investors on eToro having Corsair in their portfolio. Hence, I thought that it would be interesting to investigate the company and see if I believe it is worth a buy now. Especially because it operates in an interesting sector, and the stock price has halved from it all time high a year ago.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
This analysis will be a bit different from what you are used to read in my blog. Corsair did their IPO in 2020, meaning I don't have access to the historical numbers. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to get different numbers from various companies.
Before I start with the analysis, I should mention that I do not currently own shares in Corsair, but I own shares in one of their competitors Turtle Beach, which is 2,94 % of my portfolio. You can read my thoughts on Turtle Beach here. The fact that I own Turtle Beach won't affect my analysis of Corsair. I see myself as a rational investor, and I will invest my funds where I see the largest potential for return, not only for my own sake but also for my copiers. You can read more about how to copy my portfolio here.
Corsair is an American company that was founded in 1994 but didn't IPO until 2020. The company is a global leader in developing and manufacturing PC components and systems, and gamer and creator peripherals. They have 30 different product lines within their two business segments. Since the company was founded, they have shipped more than 190 million gaming and streaming products to 75 different countries. Their largest business segment is gaming components and systems, which account for 66 % of their revenue, while gamer and creator peripherals account for 34 % of their revenue. Their market PC component market share is 41,9 %, while their peripheral market share is 18,3 %. I would argue that Corsair has a brand moat. The reason is that customers are willing to pay more for their components, meaning that Corsair has a higher premium that than other manufacturers (for example a 43 % premium on memory products and + 23 % premium on cooling products). Another reason I will argue that Corsair has a brand moat is that in a brand loyalty survey made by DFC intelligence of 5.000 gamers showed a brand loyalty of 55 %, which was only outmatched by Nvidia, Intel and Microsoft, while it was higher than companies such as Apple and AMD.
Their CEO is Andrew Paul. He is also the co-founder of Corsair, which is something I like, as founders are usually determined in growing the business. Prior to founding Corsair, he held various positions within the semiconductor industry. He holds an honors degree in Physics from The City University, London, England. He also serves as a mentor in the Global Social Benefit program at Santa Clara University, where he offers guidance for small enterprises in emerging economies. He currently owns 2,84 % of the shares. It has been easy to find much information about Andrew Paul but sometimes the results speak for themselves. He has grown Corsair from its foundation to be a global leader within their business sector, which a great accomplishment, and I feel very comfortable with him leading the business moving forward.
I believe that Corsair has a brand moat. I feel very confident about management as well. Later I will do a discounted cash flow model to calculate a price for Corsair but before I do so, let us just have a look at some key financial metrics.
Down below we see some key financial metrics. The revenue growth is slowing from 2020 to 2021, it isn't surprising though as 2020 was a record year due to the pandemic. The gross profit margin is also decreasing slightly, which is not something you would like to see but it is still way above the pre-pandemic margin. Operating margin is decreasing even more, which is a bit worrisome but still it is important to see that it is well above the 2019 margin. I will elaborate a bit on the decreasing margins in the next paragraph when I write about the risks.
Before we continue to the discounted cashflow model, I would like to investigate the risks and potential of Corsair. One short-term risk they mentioned repeatedly in their latest conference call is the supply chain shortages. The supply chain shortages have caused graphic cards to be in short supply, as result the price on graphic cards has spiked. Hence, fewer gamers are building their PC's using Corsair's products, and they believe that 10 % of the demand of their products has been held back in 2021 due to this. Another short-term risk that got mentioned in their latest conference call is logistic costs. They mentioned that shipping times has doubled, and the prices are elevated compared to historical prices. Corsair's management mentioned that supply chain shortages and higher freight prices are what drove margins down in 2021. A more long-term risk is a change to cloud computing gaming. In their latest quarterly report, they mentioned that they take this risk seriously. If more gamers will change to cloud computing gaming, it will be bad news for their PC components business segment, as there will be less need for custom made high-end PC's, and while it won't hurt their peripherals business segment, it probably won't make up for the losses in components. The last risk I want to mention is that they have a majority shareholder. EagleTree Capital owns 57 % of the shares, hence they can control the company, so it fits their own interests, which won't necessarily be in the interest of other shareholders.
There are also lots of potential for Corsair moving forward. At the latest investors day, they introduced three pillars of growth that will lead them to their revenue goal at $3,5 billion in 2026. The gaming and creative market continues to grow quickly. They see that gaming hardware is growing faster than gaming software, and especially the creative market is growing at a fast pace. The continued growth in this market is good for Corsair, as their margins are higher than in the components segment. The gaming and creator peripherals business segment was 34 % of the revenue but 44 % of the gross profit margin. They continue to take market share. Looking at the components business segment, they have the numbers one market share in pretty much every category of components that they sell, and they are still taking market shares. While they are in top three in market share in almost all categories in the peripherals products they sell. They continue to enter new categories. In the last 18 months they have entered new large markets such as microphones, cameras, and monitors for content creators, which further broadens their peripherals products. The growth in their different products lined, and as they are continuing to take market shares, it should not only result in them reaching their $3,5 billion revenue goal but also in their gross profit margins to be above 30 %. In the next paragraphs I will go through my calculations to find the intrinsic value of Corsair.
I have now investigated the financials, risks, and potential of Corsair. I will now look at the price by doing a discounted cash flow model. To do so I will need some numbers that you can see below. The numbers are the 2021 numbers, which I could find at Finbox. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 5 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. I decided to go with a higher option due to the business Corsair operates in. The chosen discount rate of 10% is because it is usually between 9-12%. Remember that all the numbers made in these calculations are in millions.
I also need to determine how much EBIT, Depreciation & Amortization and Net Working Capital will evolve over the next couple of years. I decided to be a bit conservative when it comes to EBIT growth and expect a 20 % EBIT growth a year, which is slightly below the forecast at Finbox, which is gathered from different analysts. I calculated with a growth in Depreciation & Amortization of 10 % a year. It might be a bit high but in the latest three years, it has been between 3% and 15 % a year. Finally, I decided not to grow net working capital at all, as it is higher than normal in 2021, as Corsair decided to mitigate logistics delays by stocking up on inventory, meaning they paid more in inventory in 2021 than usually, as some of the sales will come in 2022. Hence, I decided to keep net working capital as it is. I haven't found a smart way to share all my spreadsheet here but once I did my calculations, I found that the intrinsic value of Corsair to be $21.
Having investigated Corsair, I find the company interesting. I think they have a lot of potential to grow their business moving forward. Especially because of the have a moat, and many of their risks are short-term. I also like the experience of the management, and I feel comfortable in them growing Corsair moving forward. However, I prefer the peripherals business sector over the components business sector. It has higher competition but also higher margins, which I like. For now, I prefer to stay invested in Turtle Beach and not start a position in Corsair. But if you prefer a bit more diversified business model, which gives you exposure to components, I think Corsair would be a fine investment if it drops below $21 again.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.
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