Editor’s note: This article was updated on July 20, 2021, to correct the ROI number.
Corsair Gaming (NASDAQ:CRSR) is a $2.7 billion market cap gaming console company whose revenue and earnings have been on a tear. That’s great news for investors in CRSR stock.
Look for this company’s earnings and more importantly, its free cash flow (FCF) to explode higher this year and next as its gaming popularity continues to surge. That means that CRSR stock is also likely to spike at least 43% over the next year.
Corsair expects to release its Q2 revenue and earnings for the quarter ended in June on Aug. 3. That means that investors will see just how fast the company is growing and more specifically how high its FCF margins are.
FCF and Valuation
Keep in mind that the first and second quarters are typically the slower parts of this company’s annual growth.
On page 9 of the gaming company’s 10-K annual report filing with the SEC it provided several reasons:
“Our net revenue has generally been lower in the first and second calendar quarters due to lower consumer demand following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs and GPUs, which usually take place in the second calendar quarter and which tend to drive sales in the following two quarters.”
Regardless, analysts still expect that Q2 revenue will be between $467 and $475 million, according to surveys from both Yahoo! Finance and Seeking Alpha. Compare that figure to last year, when the gaming company generated $380.4 million in gaming console and peripheral sales. So that means sales will be 22.9% to 25% higher over the comparable period.
So far, the company has yet to reveal its Q2 2020 cash flow statements. However, in Q1 the company generated $27.768 million in cash flow from operations (CFFO). After deducting $2 million in capex spending, its net free cash flow (FCF) was $25.7 million on sales of $529.414 million. That means its FCF margin was 4.85%. In addition, during 2020 Corsair Gaming made $160 million in FCF on sales of $1.7 billion, for a 9.39% FCF margin.
Corsair’s Q2 FCF margin may not be as high as its overall 2021 FCF margin. But using a 10% to 12% FCF margin for 2021, this company’s FCF could explode to $248.4 million this year and $258 million next. This is based on projections of $2.07 billion in sales this year and $2.15 billion for 2022.
What Corsair Gaming Could Be Worth
In the trailing 12 months (TTM) to March 2021, Corsair Gaming made $185.5 million in free cash flow, based on figures from TTM cash flow data for CRSR stock. Now, given that CRSR stock has a market value of $2.76 billion, this means that it has a 6.7% FCF yield (i.e, $186 million / $2.76 billion).
However, if Corsair’s FCF rises to $248 million this year as I expect it could, then its FCF yield will likely improve as well, let’s say to 6%. Therefore, if we divide $248.4 million in FCF for 2021 by 6% the resulting target market cap is $4.140 billion. That represents a potential gain of 50% over today’s market cap of $2.76 billion.
In turn, this means that CRSR stock could be worth 50% more or $44.85 per share (i.e., 1.5 x $29.90). Keep in mind that this is a pretty aggressive target, based on a 20% gain in its FCF margin from 10% to 12% this year.
But just to be conservative, let’s say that it maintains a 10% FCF margin on 2022 sales of $2.15 billion. That implies $215 million in FCF and using a 6% FCF margin, the target market cap will be $3.583 billion. This is nearly 30% higher than its present $2.76 billion market cap and implies a price of $38.78 per share.
What To Do With CRSR Stock
So now we have a range of values for CRSR stock of between $39 and $45 per share, or $42 on average, based on expectations of the company’s FCF generation. We don’t know when the stock will hit this price, but we can reasonably say that sometime in the next year to a year and a half CRSR stock will make a 40% ROI.
Let’s say it takes until the end of 2022 for CRST stock to rise to $42 based on its TTM FCF yield of 6.0% and an FCF margin of 20%. That implies an average annual compounded return of 25.1% per annum. As a worst-case situation, that is a very good ROI for most investors.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.