Corsair Gaming (CRSR +0.00%) has benefited from a surge in new upgrades from players in the video game market over the last few years. The computer peripherals and hardware company achieved an annual revenue run rate of $2 billion through the first half of the year, which is nearly double the $1.1 billion generated in 2019. Guidance calls for 2021 revenue to increase between 12% and 23% over 2020.
These expectations look very strong on top of the 55% growth in 2020, when the stay-at-home environment was causing engagement with video games to reach unprecedented levels. But over the long term, management sees more growth from market share gains in an expanding business for gaming peripherals.
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Analysts see a growing stream of profits over the next few years, with the consensus estimate calling for Corsair to report earnings per share of $1.79 in 2021. Based on Corsair's leading position in a growing gaming hardware market, the stock looks undervalued at a trailing price-to-earnings ratio of 17. At a current share price of $27.75, the P/E drops even lower when comparing it to the 2022 EPS estimate of $1.91.
Near-term uncertainty related to supply chain issues is one reason the market doesn't like Corsair Gaming right now, but secular tailwinds in the industry could push this stock significantly higher over the next three to five years.
Why the stock is undervalued
The pandemic is causing higher transportation costs and product shortages across many industries. Despite these disruptions, Corsair delivered great results last quarter, with revenue up 24% year over year. But revenue came in slightly below the consensus analyst estimate, which led to a post-earnings sell-off.
Another issue that is pressuring the stock price is that much of Corsair's sales during the pandemic came from lower-priced products. The company is known for its higher-priced premium gear, where it commands a leading market share. However, these higher-priced products are in short supply right now, which likely contributed to the revenue miss last quarter.
Why investors should expect more growth
The supply shortage might not ease until next year, so it's possible Corsair's 2021 revenue growth could come in at the lower end of management's guidance range. On the positive side, management reported during the second-quarter earnings call that supply for higher-priced products was already starting to improve.
Looking beyond 2021, the supply constraints are only increasing the likelihood of tremendous pent-up demand over the next few years. There are more people playing games and broadcasting their gameplay on streaming platforms than before the pandemic. Average concurrent viewership on Amazon's Twitch grew 28% year over year in the second quarter, according to Logitech's Streamlabs. It's no surprise that Corsair Gaming's creator peripherals segment, including sales of lighting and webcams designed for broadcasting, reported a 41% increase in revenue in the second quarter.
On top of that, there is a major chip shortage making it very expensive for players to upgrade to the latest graphics cards from Nvidia and Advanced Micro Devices. This is pressuring revenue for Corsair's gaming and components segment, which supplies parts that gamers buy when building or upgrading their PCs, which some players like to do when buying a new graphics card. Many players are not able to make these upgrades right now but will eventually come back into the market down the road, which could be a boon for Corsair's business.
Here are three more reasons Corsair will be selling a lot more headsets and other gaming essentials over time:
- The number of people playing games is estimated to reach 3.3 billion by 2024, up from 2.64 billion in 2019, according to market researcher Newzoo.
- Even with the great reopening happening through the second quarter, Twitch broke viewership records for the third consecutive quarter. Live game streaming is looking more and more like a long-term growth market.
- A major upgrade cycle is happening right now in the console market, with Sony's PlayStation 5 and Microsoft's Xbox Series X remaining consistently out of stock at retailers. As the installed base of these new consoles increases, that creates additional demand for new gaming accessories.
Corsair Gaming is a buy
All these trends point to growing demand for Corsair Gaming over the next several years, yet the stock currently trades at a cheap forward P/E of 15 based on 2022 earnings estimates. At these low valuations, investors have a good chance of potentially doubling their money over the next five years.
