Corsair Gaming Won’t Live up to Its Free Cash Flow the Way Some Believe

InvestorPlace’s Mark Hake recently made the argument that Corsair Gaming (NASDAQ:CRSR) is profitable, growing, and CRSR stock is worth $39 a share. Right now it is trading at around $29.

A photo of the Corsair (CRSR) logo on the front of a building in California.
Source: Tada Images/ShutterStock.com

My colleague based his argument on free cash flow (FCF), the Holy Grail of financial metrics. 

Basically, he takes the 2022 FCF estimate for the company of $200 million — $2.2 billion in sales multiplied by 9% FCF margin — and applies both a 6% FCF yield and 5% FCF yield to get an average target price of $39.

I don’t think there’s any question my colleague knows his way around a calculator. So, I don’t have a problem with his handiwork.

However, just because Corsair’s business continues to strengthen (its grown its sales by 115% since 2018 to $2.02 billion from $940 million) doesn’t necessarily mean it’s a buy despite the $39 price target. 

Here’s why. 

CRSR Stock and Its Peers

I went through its 2020 proxy to get a list of competitors’ names or industry leaders that its compensation committee used to evaluate executive compensation. I did this to compare Corsair to others regarding sales, earnings, margins, cash flows, etc. 

It didn’t list any, so I changed directions. 

On page 15 of its 2020 10-K, it lists some of its direct and indirect competitors. They include Logitech (NASDAQ:LOGI),  Microsoft (NASDAQ:MSFT), HP (NYSE:HPQ), and Micron (NASDAQ:MU).

Here is a comparative table that looks at several financial metrics for each company, including Corsair.

Company Return on Assets Price-to-Cash Flow Net Margin
Corsair 12.3% 18.1x 7.6%
Logitech 27.0% 13.8x 18.4%
Microsoft 19.3% 29.8x 36.5%
HP 11.7% 6.5x 6.6%
Micron 7.7% 7.7x 16.2%

Let me be clear about one thing. Just because I’m comparing Corsair to Logitech and others does not mean I think it’s in the same league as some of them. I’m merely pointing out that Corsair stock might have gotten ahead of itself. 

Of the four competitors, I would say that Logitech is the closest to Corsair in terms of products, etc. By all three metrics, Logitech easily outdoes Corsair. 

For the trailing 12 months (TTM), Logitech’s FCF is $1.14 billion. Based on a market capitalization of $16.5 billion, it has an FCF yield of 6.9%. Corsair’s is currently 4.9%, 200 basis points lower than LOGI.

Regarding FCF margin, Corsair’s is 6.8% while Logitech’s is 19.8% [FCF of $1.14 billion divided by $5.77 billion in sales].

From a purely financial standpoint, I don’t think there’s any question that Logitech has the stronger financials. 

The Analysts Like It

The nine analysts covering CRSR rate it Overweight with a median target price of $40, suggesting it has 30% upside over the next 12 months. The 13 analysts covering LOGI give it an Overweight rating with a median target price of $120.34, suggesting it has 22% upside over the next 12 months. 

The analysts obviously can’t find a lot of difference between the two. However, the valuation metrics I’ve highlighted suggested that Logitech is the better value.

Over the past five years, according to Morningstar.com, LOGI stock has had a 370.1% cumulative return compared to 47.1% for CRSR. Logitech beats it over a three-year period. Only after looking at the YTD and one-year numbers does Corsair come to life. 

If you own CRSR stock, you can thank r/WallStreetBets for helping it along. Analysts also deserve their fair share of the credit. As my colleague says, it’s been growing sales at a consistent pace. 

The fact that millennials love to game online means it’s likely to continue to benefit from this tailwind. 

However, I do like the value aspect of LOGI. It is cheap right now despite its business putting up big numbers. 

The Bottom Line

The last time I wrote about Corsair, I wondered about its male-oriented business. I suggested that if it wanted big institutional money in the future, it had better work on a more gender-diversified board

“Most technology companies aren’t very progressive. This we know. Neither are a lot of technology investors. So, it shouldn’t come as a surprise that Corsair isn’t pulling its weight when it comes to gender diversity,” I wrote in August. 

“I hope it changes this situation because anyone who doesn’t pass the ESG muster will be left behind as the months and years pass.”

Logitech has a 12-person board with four women on it, good for a 33% participation rate for women directors, almost 3x Corsair’s board. 

From an ESG (environmental, social, and governance) perspective, I don’t think there is any question Logitech is the better company. 

Long-term, I don’t think there’s any question that Corsair will have success. But the same can be said about Logitech, and it’s a lot cheaper.  

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2021/09/crsr-stock-wont-live-up-to-its-free-cash-flow-the-way-some-believe/.

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