Deep Dive: Corsair Gaming
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(Ryan) What they do: Corsair gaming is a leading provider of and maker of high performance gear for gamers and streamers. It’s a complete suite of gear for more intense gamers. They break their gear into two categories, although it might be easier to look at them by brand.
But it’s gamer and creator peripherals: This includes keyboards, mice, headsets, controllers, then there is also microphones, capture cards (hdmi plugin that allows streamers to capture high quality footage from a camera or console and edit it on their computer), and a bunch of other studio accessories. (18.3% market share)
Gaming components and systems: This is the more high performance stuff. They call it power supply units, so it’s high-end gaming PC’s and custom built PC’s. These range anywhere from $1k to $5k. But they also sell the parts to it separately if you want. So cooling liquid, fans, additional memory. I believe that’s all included here. In this category they dominate the market (42% market share)
Primarily sold through online retailers and brick and mortar stores, although they said their goal is to get to 15% of sales through DTC in the next two years. They have several different subsidiaries under the Corsair brand as well: Visuals by Impulse (licenses for streaming displays, they’re basically selling overlays), Elgato (a lot of peripherals), SCUF (high performance controllers), Origin (super high-end gaming PCs), and Gamer Sensei. They sell most of their items at a premium vs peers.
(Ryan) History: Custom PCs initially started getting built in the 90’s so Andy Paul and two others formed Corsair Microsystems in 1994 to provide high-end components and performance gear for gamers. Started with cache modules which I believe is for memory stuff, moved to DRAM modules. Basically they’ve skated where the puck has gone, but have had less dramatic shifts over the last decade.
Eagle Tree bought a majority stake in 2017, and since that time Corsair has gone on their acquisition spree. And they went public in September of 2020.
They have multiple product segments so tough to judge them all
Gaming accessories expected to be $6 billion market by 2024 (seems very reasonable)
Competitors on that include Turtle Beach, Logitech, Razer, Hyper X, and a lot of small brands
Hard to judge size of components and upgrade market but it is likely a growing one
Dell and HP are competition for gaming PC division
Would also track rise in eSports as well
(Ian) Management and Ownership:
Andrew (Andy) Paul co-founded Corsair in 1994, and is still the CEO today
Owns about 4% of shares outstanding.
Compensation of nearly $3 million in 2020, a bit high maybe, but nothing absurd.
The CFO, Michael Potter, has worked in a variety of CFO roles, most recently at a large pension fund and Canadian Solar.
I do like he gave thorough forecasts, maybe false sense of security, but I enjoy when management gives guidance across a variety of factors. Makes me feel like they really know the business and have a plan.
Thi La was recently named president and has served as COO science August 2013
Owns nearly 1% of shares outstanding
Private equity group EagleTree owns 67% of the company.
It has made a variety of investments, didn’t recognize any of the companies except for odwalla. Owned 2000-2001
Focuses on three segments, consumer, media and business services, and water and specialty industrial, mid-market acquisitions that they can launch new products, make add-on acquisitions, and enact operational improvements
Market cap of $2.88 billion, ticker CRSR
EV of $3.08 billion, seem like the better measure with the standard debt on the balance sheet
EV/sales of 1.6
EV/GP of 5.6
EV/OI of 14.3, pretty good conversion to cash flow
$1.9B in TTM revenue, up 65% YoY (peripherals is higher margin and grew by 132% this quarter, components and systems grew by 52% this quarter)
TTM Gross Margin was 28.5%, which has expanded. Most recent quarter it was 30% partially due to product mix
TTM operating income was $216M, up a lot from the year before
Operating cash flow/free cash flow looks depressed because they have a high accounts receivable right now and inventory has been constrained due to the chip shortage. But normalized, looks like it would be close to 10% FCF margins
Their adj. OI margin, which mains backs out amortization of intangibles is about 15%
SBC is minimal.
Raised guidance in Q1. Playing it slowly given reopening uncertainty
At the mid range they’re projecting 18% revenue growth for 2021
20% adj. OI growth
(Ian) Balance sheet and liquidity:
Cash of $125mm
Inventories of $234mm, up from 2020, but higher inventory turnover
Over $550mm in goodwill and intangibles, but to be expected given the acquisitions
Debt of around $300mm, expect to pay down an additional $70ish million this year. Used $28mm in OCF from Q1 to pay down debt
Kind of complicated what the interest rate is but the effective rate was 6.45%
Product Experience/Anecdotal Evidence:
(Ryan) Spoke with some streamers that I know, and if you’re a PC player this is the top of the line and kind of a must have. But even if you’re a console gamer you kind of have to use some of ElGato’s equipment like the capture cards. The HD60 S seems to be the industry standard. A lot of players see it as an investment as well.
(Ian) Cousin used them, bought case fans and some peripherals
(Brett) None. Big thing to research here is brand vs. others (i.e. is it Nike?)
(Ryan) Shown adaptability. Habits and required equipment has obviously changed a lot since 1994, and they’ve constantly adapted to it. Their brand helps ease the entrance into new product categories. I.e.: I have the Corsair stream deck and keyboard, I mine as well buy the mouse and capture cards. Also the distinguishable lighting means consumers know that a product belongs to Corsair, which incentivizes streamers to stick with the brand.
(Brett) Brand equity with consumers would be the big one here, really trying to think of it in the same light as Nike or Lululemon. Would be my biggest research task if I was trying to decide whether to make an investment in this company.
(Ian) Market share, getting to that dominant position generally creates pricing power, ability to sell more, improved logistics and supply chain
Future growth opportunities:
(Ryan) Gamer Sensei acquisition. Acquired them in October of 2020 for an immaterial amount. It’s an esports coaching platform. So lets say I wanted to get better at rocket league, I pick that game and sign up for a one on one session with a coach, which pricing varies based on their skills. It’s a bit like Fiverr. They said they have big ambitions for this brand, master classes, camps, that kind of thing. Changing up the coaching roster, because they have access to some of the most popular gamers in the world.
(Brett) The rise of eSports. This could mean sponsoring events, getting big players to sign with Corsair, which will then theoretically convince everyone else to use their products as well. Can we just buy the CEO a copy of Shoe Dog?
(Ian) Gaming content, twitch, podcasting, youtube. They are providing the tools and software (elgato) to monetize your gaming through content creation. I expect them to be the standard here as well.
Highlights and lowlights:
(Ryan) Highlights: Premier brand in a growing industry. Andrew Paul seems both humble and committed. He’s pretty much the industry pioneer. Industry tailwinds. Expected 10% CAGR in esports viewership by 2023. Twitch and YouTube basically do the marketing for them. Lowlights: Only real lowlight for me is potentially the timing of the IPO and reopening uncertainty. Came out after its best year ever, feels a bit like it’s capitalizing on that. But probably a good thing for the company. Guidance was really conservative.
(Brett) Highlights: Definite path to 15% FCF margins in my mind, solid brand equity, big industry tailwind. Lowlights: some potential durability risks including cloud gaming, and the new consoles and big VR investments making PC games lose market share again, and the fact it is mostly physical products shipped from Asia that are likely at risk of commodity price spikes currently (hopefully that is just a short-term concern though)
(Ian) Highlights: Strong market share (42% market share in pc components, 18% peripheral market share). Paying down debt. Lowlights: Amazon accounts for about ¼ of sales. 10 largest customers account for over 50% of revenue. Lot of debt
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.