Corsair: Temporary Setback

Summary

• Maintain neutral/hold call on Corsair as it transitions to dealing with post-pandemic consumers with less “stay-at-home” behavior.
• Sales growth is slowing, on both annual and quarterly trends, while forward guidance by management was uninspiring.
• Corsair has a very cheap valuation, but volatility, interest rate headwinds, and lack of significant catalysts in sight will suppress the stock’s price.

lakshmiprasad S/iStock via Getty Images

Introduction

Between Feb-2021 to Nov-2021, I had the only "hold" rating on Corsair Gaming, Inc. (NASDAQ:CRSR) on Seeking Alpha. This was then considered a contrarian call, when all other ratings were "buy" or "strong buy." Since then, the next "hold" was published on Dec-2021, followed by another one in Feb-2022. In other words, there is an overwhelming amount of bullish sentiment on Corsair, which also raises concerns of herd behavior. Back then, when I covered the company in Jun-2021, I was concerned with the valuation of the stock, which suggested it was time to take some profits, leading to a downgrade from my bullish call to a neutral rating. In addition, I noted in my summary that "sales will slow going forward as markets look past the pandemic."

Now that the price of CRSR has plummeted below its IPO price of $17, it is probably a good time to revisit this company and consider if cautious accumulation is warranted.

Flagging momentum, weaker industry outlook

When I last covered Corsair Gaming, I noted that performance was generally lagging. At present, "lagging" is an understatement, and CRSR has significantly underperformed. The chart below shows that CRSR has declined 42% since the first day it traded on the NASDAQ. However, CRSR is not alone as other gaming-related ETFs such as JSML, NERD, and GAMR have also fallen out of favor, falling between 6% and 28%.

Seeking Alpha

Seeking Alpha wrote a good article on the flagging industry trends: "Videogame industry sales slipped year-over-year for a fifth straight month in March, as the group continues to wrestle with some tough pandemic comparisons and the ongoing challenges at getting hardware into gamers' hands." This probably alludes to the oft-mentioned supply chain disruptions plaguing the global economy.

This confirms my initial fears that "stay-at-home" behavior will eventually change to "gotta-go-out" behavior. I am no social anthropologist, but I reckon that this extreme change in behavior is a sporadic mood swing leading to a temporary change in consumer activity. Revenge shopping and pent-up demand are certainly showing up on the economy's radar.

Being temporary, this change in consumer behavior is probably going to normalize at some point in time, before people return to their usual routines. I suspect gaming and the need to purchase computer peripherals are an ongoing structural demand trend, something that is not going to suddenly disappear just because spending activity has just shifted for a while. Furthermore, Seeking Alpha's article suggests that the drop in sales we have seen is in the single-digit to teens, hence we are not looking at a massive drop in sales akin to the percentage stock price drop of CRSR. I believe this gives credence to the thesis that CRSR has overreacted to the outlook for slower sales in 2022.

Cheap valuation, but note the implied volatility

Markets continue to adjust to Corsair's proposition as a value stock, since future growth rates are expected to be adjusted downward. Additionally, all eyes are on the popular trade of post-pandemic beneficiary sectors, a shift out of the virtual world back to the "real" world.

Of note, US-based companies such as LOGI and CRSR have more or less halved in valuation since I last wrote on the stock at its peak in mid-2021. During the same period of time, competitors such as Razer (listed in Hong Kong) have seen their stock prices increase slightly. This is rather interesting, since their industries are similar. Therefore, one can surmise that this difference in stock price performance was greatly influenced by the divergent interest rate policies between the U.S. and China, with the former raising interest rates and the latter cutting interest rates. With this reasoning, it appears that CRSR had to also grapple with aggressive Federal Reserve policy, sending another headwind in its way.

As shown in the below table, another reason for the poor performance by CRSR is due to the recently poor sales growth where 2H2021 revenue compared to 2H2020 declined by 11%, as compared to a growth in its competitors. However, one-year forward sales growth at CRSR is expected to outperform LOGI and match Razer's - although this is at risk of a downgrade based on management's guidance in its 4Q2021 earnings call presentation that sales in 2022 would probably be flattish. Another positive point to note is that the valuation of CRSR is cheap, with a P/S and P/E ratio significantly below that of its peers shown in the table below.

Seeking Alpha, Yahoo Finance, Reuters, Author

However, as I noted before, one could be easily disappointed if Corsair maintains increasing sales growth, but the general headwinds in revenues suggest there is the risk of forecast downgrades. Furthermore, historical and forward sales growth trends in Corsair suggest a great variability in income, something which the stock market appears to be factoring in. These issues also imply that the price volatility of CRSR and its beta will be high, which is not bad in itself, but a characteristic that buyers of CRSR will have to stomach.

Sales growth is decelerating

As shown in the figure below, the 4Q2021 results presentation continues to suggest that growth trends are decelerating. Year-on-year, between 4Q2021 and 4Q2020, sales dropped 8%. Revenue growth has also decelerated significantly from 55% growth in 2020 to 12% growth in 2021.

Corsair Gaming

Of course, we might not want to read too much into these growth rates, since the 55% growth in 2020 was extraordinary and driven by the pandemic, hence the bar for growth has been set at an unusually high level. Furthermore, the drop in sales growth in 2021 was due to supply chain challenges - for example, management explained that "Ocean freight costs per container ran as much as 4-5x higher than normal pre-pandemic levels." However, it is difficult to estimate when the supply chain challenges will ease, and this has already affected profit margins by 1-2%. Management also cited the lack of reasonably priced GPUs (Graphics Processing Units), which hampered the sales of co-dependent desktop units.

Altogether, this creates an uncertain sales outlook, and management has guided a mere 0% to 10% net revenue growth in 2022. While it was within my initial expectations that pandemic-induced sales momentum would ebb, the latest numbers suggest that the growth story of Corsair has greatly diminished for now.

Conclusion

Corsair continues to navigate the choppy waters of higher interest rates and supply chain challenges. As such, sales growth has decelerated and a lack of significant catalysts in sight will suppress the stock's price. While the valuation of CRSR is very cheap (P/S ratio less than 1), markets may have a difficult time adjusting to seeing CRSR as a value stock rather than a growth stock. The perception of CRSR as a growth stock continues to feature saliently in the market's memory, and macroeconomic headwinds continue to create a general risk aversion towards companies where growth is perceived as its primary driver.

That said, these issues are temporary, although it is necessary for signs that supply chain challenges are easing and for momentum in stock price and sales to stabilize before an upgrade to a "buy" call. The saving grace of CRSR in support of its "hold" call is its cheap valuation, although it may take some time before a material shift in trend is realized.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[19432511]

From 50 to 16. This has been satisfying to watch.

[Daan van Oekr]

@19432511 It is never different