The pandemic sent sales for computer and gaming peripherals soaring, and two stocks that greatly benefited were Corsair Gaming (CRSR -1.15%) and Logitech International (LOGI 0.45%). These companies are leaders in this burgeoning market, and both offer investors similar growth profiles.
Over the last five years, Logitech's revenue has increased 156%. Corsair Gaming just had its initial public offering in 2020, but it posted a revenue increase of 55% last year -- slower than Logitech's 76%, but still stellar, especially compared to its relatively low valuation.
While near-term growth is expected to slow compared to the pandemic-driven momentum in 2020, Corsair Gaming and Logitech have bright futures in the estimated $36 billion market for computer gear. But Corsair offers much better value at a forward price-to-earnings (P/E) ratio of just 17.6, which is significantly cheaper than Logitech's 28.9 multiple.
Is Corsair severely undervalued, or are the shares a value trap? Let's find out.
Comparing growth in gaming peripherals
A big factor in valuation is growth. Faster-growing companies usually trade at higher P/E multiples than slower-growing companies, especially when comparing stocks in the same industry.
Logitech has been the faster grower over the last two years. In Logitech's fiscal fourth quarter ending in March, it posted revenue of $1.5 billion for a compound annualized rate of 55% compared to fiscal Q4 2019. Corsair posted revenue of $529 million, or a two-year compound annual rate of 47% going back to the March-ending quarter in 2019.
However, Logitech's forward guidance calls for revenue to be approximately flat in fiscal 2022, plus or minus 5%. Logitech also expects adjusted operating profit to decline between 33% to 37% year over year.
This looks weak compared to Corsair Gaming's guidance, which calls for continued growth. For 2021, revenue is expected to increase between 11.6% to 23.4% over 2020. Adjusted operating profit is also expected to increase between 14.7% to 24.5%.
It's Corsair's guidance for more growth in adjusted operating profit compared to Logitech's softer guidance that may indicate Corsair is significantly undervalued right now.
Of course, there is more to valuing a stock than near-term growth expectations. Over the next five years, analysts expect Logitech to grow earnings at an annualized rate of 30% per year, compared to just 10% for Corsair Gaming.
Still, analysts might be underestimating Corsair, given the secular trends in the gaming industry. Corsair Gaming CEO Andy Paul cited trends in the last earnings report that could benefit the company for many years:
We are excited to see the market for gaming and streaming product continue to grow at such a pace. It is clear that a new wave of gamers and streamers has entered the market as well as consumers building gaming PCs for the first time. Our expectation is that all these people that are new to the market will continue to buy gaming and streaming products from us for many years into the future.
Logitech is the lower-risk business
Equally important to future growth prospects, investors also highly value a company with lower business risk.
Logitech sells a much greater variety of products, which lowers its risk profile. It's not just dependent on gamers buying new gear -- it sells pointing devices, webcams, and other accessories for people working from home or who need video conferencing essentials for the office. Logitech is also expanding its market opportunity by entering the streaming software services market with the 2019 acquisition of Streamlabs.
Corsair Gaming mainly sells products to the gaming crowd, such as keyboards, mice, controllers, and headsets. It also has a growing revenue stream selling products to content creators on streaming platforms. Its two operating segments are gamer and creator peripherals, and gaming components and systems, where it sells computer parts for building PCs. The components segment makes up most of Corsair's business, but the gamer and creator peripherals segment is growing faster and generates higher margins.
Another advantage for Logitech is a stronger balance sheet. As of the most recent quarter, it held $1.75 billion in cash and no debt.
At the end of March, Corsair held a net debt position of $172 million after deducting cash. Management is in the process of paying down its debt, but investors are clearly going to favor the cash-rich business over the one with debt.
Corsair Gaming offers more upside
Logitech's product diversity, balance sheet, and superior record of growth are likely why investors are paying a higher premium for the shares over Corsair Gaming. We also have to consider that Corsair Gaming is a somewhat unknown entity to investors right now since it just had an IPO, which partly explains why it has a lower valuation.
Good values in the stock market are discovered by thinking about what a business will look like in the future, and comparing that to how the market is valuing the stock today. I believe Corsair Gaming's new product releases to drive growth in the near term and its debt reduction will go a long way to reward the stock with a higher valuation. As Corsair grows, it's going to look more like the cash-rich Logitech down the road.
I own shares of Corsair Gaming and believe the stock is a good investment from current price levels.