How To Play This Gaming Component Maker's IPO

| About: Corsair Components (CRSR)

The Offering

Corsair Components (CRSR) manufactures high-performance components for PC gamers, specifically those who build their own computers or customize pre-built systems to achieve faster processing speeds and improve graphic capabilities. The company has around 800 employees and is based out of Fremont, California. Corsair is pricing 6 million shares at a price of $12 - $14 per share and is expected to begin trading on May 24th. It hopes to raise $78 million and trade with a market cap of $223 million. The managers and co-managers of the deal are Stifel Nicolaus Weisel, RBC Capital Markets (NYSE:RY), William Blair & Company and Needham & Company.

Corsair Components' Business

Today's leading edge video games have vast virtual environments, high quality digital sound and in order to be successful must create an in-depth and immersive user experience. To use all the features of today's popular games requires significant computer system resources, for the best experience most serious gamers will purchase substantial upgrades over the factory built computers. Hardware sales to serious gamers is Corsair Components' target market. A market research firm has estimated that the worldwide PC gaming hardware market was $17.9 billion in 2010 and should grow annually at a compound rate of 10.8% reaching $27 billion in 2014.

Corsair Components main product lines consist of hardware for upgrading PCs like dynamic random access memory modules, power supply units, solid state drives, cooling systems and accessories. Its other product line consists of peripheral components like headsets, speakers, flash drives, keyboards and mice.

A massive industry shift is currently happening in the video game market and has been covered in the news, by bloggers and gaming industry insiders. That is the shift away from console games, like those for PS3, Xbox and Wii, which are purchased in a store and taken home by the customer to play. In favor of downloadable games, online games like Zynga (NASDAQ:ZNGA) offers, and games which are only played in multi-player environments like World of Warcraft. The migration has given rise to many rumors that are now swirling around the next generation of consoles, specifically the PS4.

Many of the rumors involve the industry's attempt to combat piracy and it may make console games require an activation code that will make the game only work on one specific console. This means no more used games on the market (sorry Gamestop (NYSE:GME)) and kids won't be taking their new games over to their friends house or trading them with each other. This "Activation Code" will also be a gamers identity online for the multiplayer version of the game and it will likely cost a monthly fee in addition to the $60 - $70 the game costs in the store. If any incarnation similar to these rumors occurs, then there will be a huge shift from console gaming into PC gaming.

Corsair's Competitors

In a broader market view Corsair's main competition could be viewed as coming from console system manufactures like Sony (NYSE:SNE), Nintendo and to a lesser extent, Microsoft (NASDAQ:MSFT). Of course Microsoft is even more entrenched in the PC business than in console gaming and provides the platforms for both with Xbox and Windows Operating System. In direct competition to Corsair's DRAM module and USB flash drives are companies like Micron Technology (NASDAQ:MU), SanDisk (SNDK) and Kingston Technology. In the solid-state drive market are large semiconductor players such as Intel (NASDAQ:INTC), OCZ Technology (NASDAQ:OCZ) and Samsung. Corsair also faces significant pricing pressure for solid-state drives from widely recognized brand names like Western Digital (NYSE:WDC) and Seagate (NASDAQ:STX).

Corsair Components' Financials

For an 'Emerging Growth Company', Corsair's balance sheet looks pretty good. For 2011, the company had $455 million in net revenues and $19 million in net income. One of the concerns it could face on the public market is its lack of growth. In 2007 the company posted revenues of $379 million, which is almost the exact same as it earned in 2010. Corsair has managed to increase its net income over that period and the primary reason is its gaming components and peripherals segment which grew from $17.3 million in 2007 to $219.8 million in 2011. The gaming components and peripherals segment generally has a higher gross margin than its high-performance memory components segment.

At the midpoint of the range, the company expects to receive $42.2 million and first use the money to pay off its credit facility. Corsair states in its S1 that one of its strategies is to grow through acquisitions and the rest of the capital from the IPO is designated for that, working capital and general corporate purposes. If Corsair can find complimentary businesses to acquire it could increase its growth rate and the stock will perform better on the public market.

How To Trade Corsair Components

It always bodes well for a company when it doesn't need the capital from its IPO to survive and can set aside a large portion for growth strategies like acquisitions. One thing I don't like to see is that insiders are selling 1,876,000 shares in the offering. That's a large portion, almost 33%, of the 6 million total shares being offered. However, considering the business that Corsair is in, the company's profitability, significant revenue and low float of shares (17 million outstanding), Corsair stock should be well received by the market and I would look to get shares at the IPO price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I may initiate a long position in CRSR over the next 72 hours.