Corsair Gaming (CRSR) is now trading at roughly double of its low during its trading debut in September. It is worth revisiting this recently IPOed company given the revival of interest in tech stocks, as Nasdaq appears poised to exceed its record high. This article attempts to peg a fair valuation to Corsair as markets question if it’s time to profit-take.

An undervalued stock

While Corsair Gaming is widely seen as a tech growth stock, it has a short history of public financial data, hence it would be important to have at least a comparison of its valuation against peers. There are not many direct comparisons which are listed – i.e., those specializing in computer peripherals, such as keyboards and mouse, and the available comparisons become fewer if we zoom into the space for gaming devices. In the comparison table below, Corsair and Razer (1337.HK) are most closely related in their focus on the gaming peripherals market. Logitech (LOGI) serves a wider market, including the commercial space.

Valuation comparison of computer peripherals companies

Company

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Ticker

Market cap (USD m)

Price / sales

2021 P/E ratio

1H2020 (Jan to Jun 2020) sales (USD m)

Market cap / Sales

Corsair Gaming

CRSR

2,550

1.96

27.0

688.9

3.7

Razer (public listed in Hong Kong)

1337.HK

2,690

2.88

Negative earnings

447.6

6.0

Logitech

LOGI

16,220

4.29

23.5

1,449.8

11.2

Source: Nasdaq, Reuters, MarketWatch; Author’s calculations

The above table indicates that despite the share price almost doubling from its post-IPO low, the P/E ratio is not unreasonable as compared to tech sector bellwethers such as the FAANG, where the P/E ratio trades easily above 30 times. Furthermore, the current P/E ratio of Corsair is about 3% below the overall P/E of the Nasdaq, and is not overvalued against this broad measure. On other metrics, such as price-to-sales and market cap-to-sales, Corsair is cheap by a discount of 57% and 45% respectively. Assuming the stock price catches up to the average of the discount of 51%, a valuation of $42 on Corsair is highly plausible. This $42 valuation is conservative given that many tech companies with higher valuations are making net losses and positive momentum has been lifting the sector regardless. In any case, there is still material upside for Corsair despite more conservative estimates such as the $32 by Goldman Sachs.

Healthy growth prospects

The growth story for Corsair remains compelling, driven by:

  1. Stay-at-home behaviour – Consumers would likely diversify their activities apart from just watch TV, Netflix, etc.
  2. Even if one doubts the long-term story, fourth-quarter retail sales will be boosted by Black Friday and Cyber Monday, feel-good sentiment after the election, Christmas and New Year spending.
  3. The increasing importance of the home PC – Behavior is changing, whereby the home PC is not just a device for work but also a device for play. Previously, there was less attention being paid to the home PC, as most time was spent in the office, and upgrades would benefit Corsair, which provides unique products rather than basic ones.
  4. Decline in outdoor entertainment and physical sports, resulting in an increase in e-sports – The pandemic has resulted in more homely behavior, and some of that entertainment time would likely flow to PC gaming.

Consider the growth numbers Corsair has demonstrated so far (see below table). The 2020 estimate of +32% revenues is based on first-half 2020 results and assumes the quarterly sales continue at June’s level without increase (again, a conservative assumption, since fourth-quarter sales will likely be higher). Historical anchoring may lead many to assume growth in the mid-teens, hence the +32% sales growth estimate probably has yet to be priced by the market.

Revenue and growth rates at Corsair

Quarterly

Jun-19

Sep-19

Dec-19

Mar-20

Jun-20

Sales/Revenue

240.86

284.37

326.58

308.52

380.41

Growth %

18%

15%

-6%

23%

Annual

2018

2019

2020(E*)

Sales/Revenue

937.55

1097.17

1449.75

Growth %

17%

32%

Source: Reuters; Author’s calculations.*Note: E = estimate, author’s calculations – refer to content for explanation.

Key Risks

As with any rising star, each company has its fair share of risks. For example, Corsair Gaming’s sales would be hampered if there is a sharp reversal of stay-at-home behavior. However, the mitigant to this is the creation of persistent e-sports hobbyists following lifestyle changes caused by the pandemic over the past couple of months. This pandemic over the last couple of months would have had enough time for a “conversion period” as entertainment activities diversify away from the outdoors to indoors. Secondly, competitive positioning is middling, which could see market share being sandwiched between higher-end peers such as Razer and Logitech, and lower-cost, non-branded computer peripheral and component suppliers. The latter risk is greater if the US government’s stance on trade policy with China softens too drastically. That said, current and expected valuations based on the forecast in this article do not assume a premium P/E ratio in its fair valuation.

Thirdly, news of the vaccine may lead to a more generalized rotation out of the tech sector back to the real economy. However, Corsair is less vulnerable compared to some other tech sector stocks (e.g., stocks such as Zoom (ZM), which relies on the proliferation of home offices), since it produces products which do not depend too much on the stay-at-home economy. Steady demand for affordable luxuries and upgrades remains synonymous with Corsair and millennial consumerism.

Conclusion

Despite the massive run-up in Corsair stock price, a valuation of $42 is justified, taking into account metrics such as the P/E ratio and market cap-to-sales ratios. Directly comparable peer Razer (as well as many other non-comparable tech companies) is still making net losses despite rising sales in this environment, hence Corsair is positive profits are likely ahead. A $42 valuation is conservative considering growth prospects next year and the creation of further customer inroads following deepening investments from its IPO proceeds. Furthermore, macro tailwinds following the election and technical momentum will support a rising stock price for Corsair.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.