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Corsair Gaming Stock Jumped 143% in 2020, but Has Room to Run

By John Ballard - Dec 11, 2020 at 7:15AM

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Investors are underestimating the long-term growth potential of this leading supplier of computer components and streaming products.

Corsair Gaming ( CRSR -3.44% ) has been around since 1994, supplying gamers with the computer components to build their own gaming PCs. But the gaming world is not what it used to be.

In 2020, gaming has taken a huge step toward being another social media outlet, as players stream their gameplay to the masses on Amazon's Twitch and other streaming platforms.

To address the needs of today's gamer, Corsair Gaming is stretching its horizons to new product categories, and it could pay off big for investors who catch on early.

A young man playing a video game on a PC while wearing a headset

Image source: Getty Images.

Streaming products are in high demand  

Supplying the nuts and bolts to keep gaming PCs performing at fast speeds has been Corsair's bread and butter for years. Sales of power supply units, memory modules, and other components made up 65% of Corsair's revenue in the third quarter and grew 38% year over year, but new products designed for putting together a professional-looking streaming broadcast are growing much faster. 

Sales of green screens, lighting, microphones, and video capture cards are exploding. These products made up 35% of Corsair's business last quarter and grew 129% year over year. 

A wave of new customers has been crucial to Corsair's growth in 2020, but this could be a preview of where the business could be 10 years from now.

How Corsair can sustain revenue growth

The product innovation from the leading manufacturers of graphics processors, such as NVIDIA and Advanced Micro Devices, will ensure that gamers continue upgrading their PCs with new components to play the latest games. As graphics technology has advanced over the years, video games have become more immersive, which precipitates continuous upgrade cycles.

However, live game streaming is a whole other animal. Streaming has only started to take off in recent years but has already become a mainstream social outlet for players around the world. Last year, viewers spent over 12 billion hours watching others play games on Twitch, Alphabet's YouTube Gaming, and Facebook Gaming. 

Based on Corsair's estimates, the incremental new buyers that entered the market for gaming and streaming gear in 2020 represented less than 5% of the gaming population in the U.S. alone. Based on that finding, the company will likely do fine if just a small percentage of gaming enthusiasts continue to buy its products. However, we are in the early stages of a major transformation happening in the gaming industry that could open up Corsair's opportunity to a wider customer base.

Social connections are increasingly driving the growth in the video game industry. Plenty of gamers are content with the single-player games on the market, but some of the most-played titles -- such as Epic Games' Fortnite, Take-Two Interactive's Grand Theft Auto V, and Activision Blizzard's Call of Duty -- are popular for their multiplayer game modes. This trend also explains why gamers want to start streaming and connecting with others through online chat.

CEO Andy Paul pointed out during the company's third-quarter conference call that most streaming channels have less than 100 viewers. This is important because it shows that you don't have to be a celebrity to be a successful streamer. Literally anyone can buy a video capture card and microphone and start streaming their gameplay. Streaming is not about getting famous but more about small groups getting together to have fun.

Selling more streaming gear is a big opportunity for Corsair Gaming since there are an estimated 1.3 billion gamers playing on PC worldwide. The total pool of gamers across all devices is expected to steadily increase through 2023, according to Newzoo. "That means that we've got a massive opportunity, in terms of the number of people that could start streaming," Paul said.

Expanding to new product categories

The growth story could get even better if Corsair can expand to new product categories. The company has already proven it can do just that. Since 2018, it has made three acquisitions, including a deal with Elgato, which allowed Corsair to enter the streaming gear market. More moves like this could be a significant driver of revenue growth over the next decade.

For example, in its S-1 registration filing ahead of its initial public offering, Corsair explained that the acquisition of Elgato in 2018 allows it to potentially sell products for other streaming use cases, including products for podcasting, video blogging, interactive fitness, and work-from-home needs. 

Most importantly, management is allocating capital to steer its product portfolio to drive growth in profits, which is fundamental to fueling a higher stock price. Corsair's gross profit margin has improved substantially over the last year, largely thanks to the shift in sales to higher-margin streaming products. 

Three charts showing the improvement in Corsair's gross profit margin.

Image source: Corsair Gaming's November 2020 investor presentation.

Investors should be aware that the market for gaming peripherals is highly competitive, but Corsair is a leading brand in the field, which should protect its ability to continue producing a healthy profit and delivering returns to investors. 

At a forward price-to-earnings ratio of 28, this growth stock is not expensive and leaves room for further gains in 2021, especially if management continues to execute its plan to gain market share and improve margins. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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