Corsair's Initial Price Offering Comes With 2 Big Risk Factors

| About: Corsair Components (CRSR)

Computer hardware component maker Corsair (CRSR) is set to go public this week with an expected price range of $12.00 to $14.00. The company is trading 6 million shares with 4,124,000 shares being sold by the company and an additional 1,876,000 being sold from existing shareholders. After the IPO, a total of 17,152,159 shares will be outstanding. Assuming a selling price at mid range of $13, Corsair will have a beginning market capitalization of $223 million.

The company, founded in 1994, makes hardware components for personal computers, with a large market of its customers being people who play video games on computers. Gamers who build or upgrade their computer are typical customers of Corsair's products. The company operates in two business segments:

  • High performance memory components $235.4 million, 51.7% of sales
  • Gaming components and peripherals $219.8 million, 48.3% of sales

Corsair products can be found in 60 countries through retail stores, distributors, and Internet sales. Some of the company's partners include:

  • Fry's Electronics
  • Micro Center
  • Best Buy (NYSE:BBY)
  • PC World accounted for 11% of Corsair's sales in 2011. The top 10 distributors accounted for 40% of 2011's sales.

Fiscal year saw Corsair earn $455.2 million in revenue. The company posted a profit of $74.4 million and net income of $19.4 million. The company's most recent quarter (ending 03/31/12) saw net revenue of $132.6 million. Net income for the most recent quarter was $3.1 million. Net income (in $millions) and earnings per share are listed below:

2007 2008 2009 2010 2011
Net Revenue 379.7 341.1 325.6 379.6 455.2
Earnings Per Share 0.39 0.94 -0.71 -0.84 1.59
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Corsair relies on video game companies to produce heavy graphic games with complex storylines. The company's prospectus lists games like World of Warcraft, Call of Duty 2, Battlefield 3 and Star Wars: The Old Republic. The question I have is whether new gaming consoles from Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) next year can hurt a company like Corsair. The company listed an increased shift to complex personal computer games. Big computer games like Diablo III, Starcraft, World of Warcraft and Star Wars have already been released and the growth might not be there in the future.

The company lists its core strengths as:

  • Customer loyalty and strong brand recognition.
  • Broad product portfolio.
  • Global sales and distribution network.
  • Efficient operating model and scalable supply chain.
  • Strong and experienced management team.

A huge risk for the company going forward is its dependence on Europe. The European region made up 51.5% of fiscal 2011's sales. With the current financial risk, it seems like a risk to invest in a company with a product that is not needed. As consumer spending decreases in Europe, the company's future earnings may be impacted negatively. The American region accounted for 34.9% of 2011's sales, with Asia Pacific making up the additional 13.6% of sales.

Another risk I found in the risk factors is, "Cloud computing may harm our business." This risk factor could be a huge block for the company to overcome. Companies and individuals are shifting to cloud based software on their computers. As more people do this, they will be less reliant on huge memory on their own computer as their items are stored elsewhere.

After the company's IPO, chief executive officer and co-founder Andrew J. Paul will own 20.1% of the company's shares. The entire board of directors and executives, including Paul, will own 40.1% of the shares. Through an employee stock plan, employees of Corsair will own 12.3% of the company.

I would stay away from Corsair and its initial price offering. I think the dependence on Europe and a change in video game consoles are two big reasons to stay away. If the company can shift away from the European region and diversify its business, the debt free company might be a long term bet.

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

Additional disclosure: I am long Activision Blizzard, which makes the mentioned games World of Warcraft, Diablo III and Call of Duty.