Other than rising after its initial public offering and then three distinct spikes on the stock market, Corsair Gaming (NASDAQ:CRSR) stock went almost nowhere lately.
Reddit’s r/WallStreetBets briefly sent CRSR stock to over $40 by June 14 by trying to squeeze the short-sellers.
Although the stock has a short interest of 15.2%, Corsair will need more than internet meme to attract more investors.
What will it take for stock markets to recognize Corsair Gaming as the real deal in the high-end computing space?
In the first quarter, Corsair reported an impressive 71.6% increase in revenue year-over-year, to $529.4 million.
Gross margins rose, benefiting from strong gamer and creator peripherals segment sales. Operating income quadrupled (up 404.5% Y/Y) to $67.3 million.
Markets yawned at the strong results. The increasing vaccination rates worldwide may lead to looser business restrictions.
Companies may ask staff to return to the office, at least part-time. That shift would undermine the stay-at-home video gaming trend.
Still, gamers may have jobs that do not require a return to physical work. This would suggest that at a forward price-to-earnings ratio in the teens, the stock is undervalued.
Investors do not typically value computer hardware stocks at high P/Es. For example, HP Inc. (NYSE:HPQ) trades at a forward P/E of below 10 times.
Dell trades at 11 times forward P/E. Value investors should consider CRSR shares as relatively expensive at a 16x forward P/E.
A Closer Look at CRSR stock
PC gaming sales exploded to the upside during the pandemic. Before that, its popularity still rose steadily.
Given a 36% increase in average game time (projected on slide 6), Corsair product sales are poised for growth through 2024.
Do-it-yourself investors may build a 5-year discounted cash flow model (Gorden Growth Exit). This uses the Perpetuity Growth formula to calculate Terminal Value after five years.
Assuming an easily achievable perpetuity growth rate of 2.5%, CRSR shares are worth almost $40.00.
|Discount Rate||9.0% – 8.0%||8.50%|
|Perpetuity Growth Rate||2.0% – 3.0%||2.50%|
|Fair Value||$33.18 – $47.01||$38.94|
ESports is a growing trend. Twitch, which has 9.6 million creators streaming each month will widen Corsair’s addressable markets.
To capture this market, the company launched 84 products in the 12 months ended March 31. It shipped 33 million units and acquired three companies.
Corsair acquired Visuals by Impulse, the world’s premium design platform for creators. Looking ahead, the company has plenty of capital and strong cash flow to acquire product-oriented firms.
Corsair has $299 million in debt and $177.3 million in net debt. It paid down $28 million of its debt in the first quarter. Markets may shy away from hardware-heavy technology stocks that have even modest debt levels.
The Federal Reserve indicated a willingness to raise rates sooner. Corsair’s interest rates will not weigh on cash flow. But markets may avoid companies having an S&P corporate debt rating of B+.
Corsair will grow through content creation initiatives, direct-to-consumer sales, software and services, and offering an integrated experience. It has a wide variety of products for consumers. As podcasters, twitch live stream users, and gamers select Corsair products, profits will grow. So, the stock deserves to trade at higher P/E multiples.
Traders who took advantage of the short-lived “pop” in Corsair shares may wait for the next opportunity. The stock is stuck in a very narrow range. Impatient investors may consider buying Logitech International (NASDAQ:LOGI) or Turtle Beach (NASDAQ:HEAR) instead. Demand for webcam and mouse peripherals will not fall. And pure-play audio component suppliers also benefit from the gaming market.
The astute investor may also buy Corsair, Turtle Beach, Logitech, Dell, and HP Inc. stock for diversification. That way, shareholders will not feel the pain of waiting for Corsair to break out again.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.