Callaway Golf (MODG 1.23%) and Corsair Gaming (CRSR -0.37%) are two well-run companies that have generated strong growth over the last 12 months. While both businesses exhibit unique characteristics and possess some competitive advantages, their valuations aren't quite cheap enough to warrant calling them "screaming buys" just yet.
However, if their management teams continue to execute on their current strategies, each could turn out to be a great investment over the long term.
Image source: Topgolf.
Callaway
Roughly five months have passed since Callaway finalized its all-stock acquisition of Topgolf. In the wake of that purchase, Callaway owns a diverse set of businesses, including multiple apparel providers, golf equipment manufacturers, and a sports entertainment and technology company.
While the company's golf equipment segment has delivered strong growth over the last year, it's the Topgolf business that should have investors excited. Compared to golf played on a traditional course, Topgolf provides a more social and family-friendly experience. With independent lounge areas across multiple levels, customers get a restaurant-like atmosphere coupled with the fun of a driving range.
It's a unique experience that can serve as a good introduction to the game. In fact, according to a survey from the National Golf Foundation, "75% of non-golfers that visited a Topgolf said they're now interested in playing on a course." With that in mind, Topgolf's pro shops should provide a valuable sales channel for Callaway's equipment and apparel brands.
But it's not just the acquirer that will benefit from the deal. Topgolf will now be able to access some of the approximately $400 million in cash and equivalents on Callaway's balance sheet to help accelerate its venue expansion. Although the pandemic presented challenges for Topgolf in 2020, Callaway CEO Chip Brewer stated on the first-quarter earnings call in May that for this year, management expects the Topgolf unit to meet or exceed its 2019 revenue of $1.1 billion.
Callaway currently has a market cap of $5.9 billion, giving it a valuation of about 22 times Callaway and Topgolf's combined adjusted EBITDA from 2019 (or 16 times their combined EBITDA estimate for 2022). While that might not seem glaringly cheap at first glance, if the company can reach management's stated goal of $1 billion in adjusted EBITDA this decade, it will look in hindsight like a great price to pay.
Image source: Getty Images.
Corsair Gaming
Corsair Gaming is a premium brand in the e-sports equipment and accessories market. It provides a wide variety of items ranging from high-performance keyboards all the way up to $5,000 pre-built gaming PCs.
The company currently has the No. 1 market share in most of its product lines, and since the brand is well known for its top-flight engineering and product quality, customers are willing to pay more for its gear. According to the company's IPO prospectus, its computer cases, cooling solutions, and power supply units all sell at premiums of 30% or more compared to competitors' products.
The pandemic helped spur revenue growth as well. With people spending much more of their leisure time at home, the demand for video gaming components accelerated. This helped Corsair generate more than $1.9 billion in revenue over the last 12 months and led to it booking 72% revenue growth in the most recent quarter. Those increased sales also helped drive a strong boost in profits as the company's first-quarter operating margin jumped from 4.3% in 2020 to 12.7% in 2021.
However, despite all this, Corsair stock only trades at about 13 times operating income. This is most likely due to investors' belief that its 2020 financial performance was anomalous and not likely to be repeated. So far, that view seems to be justified.
According to gaming industry experts, in June, spending on gaming accessories decreased versus the prior year. While it's still possible that Corsair will deliver strong financial results for the second quarter, it's fair to assume there will be a significant slowdown in sales in the near future (management is guiding for full-year 2021 top-line growth of just 17%).
But even with that short-term lumpiness in mind, the long-term trends still favor Corsair. Thanks in part to content-sharing platforms like YouTube and Twitch, competitive gaming has become more lucrative. This has driven rapid growth in the e-sports market over the last decade, and that trend is expected to persist. The growing number of gamers need the proper gear to optimize their performance, and Corsair will be right there to provide it.
