When a company posts a decline in sales and profits, but the stock still goes up, it's usually a good sign that the stock is undervalued. That's what happened to Corsair Gaming (CRSR -0.13%) after its third-quarter earnings report on Tuesday.
Supply chain issues pinched Corsair Gaming's sales, causing revenue to drop 14% year over year. Profits also plunged to a meager $1.8 million, or $0.02 per share, compared to $36 million in the same period last year.
Apparently, investors were expecting much worse numbers, as the stock price jumped a few percentage points on the news. Let's look at the state of Corsair's business and why the stock could be a steal at the current price level.
Demand trends look healthy
Looking at each segment's performance, the slump in revenue was due to the 13.8% decrease in gamer and creator peripherals revenue, which came in at $139 million. Sales of gaming components -- including memory chips, PC power supplies, computer cases, and pre-built gaming PCs -- increased by 14.8% year over year to $252 million.
In Q3 2020, when everyone was home playing video games, Corsair reported a 61% year-over-year jump in revenue, driven by a 129% surge in creator peripherals and a 38% increase in gaming components and systems. Obviously, that stellar performance wasn't going to repeat year after year, but many people who picked up the hobby during the pandemic are still sticking with it.
Looking at the year-to-date performance, the long-term trend comes into focus, with revenue up 22% year over year through the nine-month period through Q3.
It's notable that Logitech's Streamlabs' Q3 report shows that the total number of unique streaming channels across Amazon's Twitch, Alphabet's YouTube Gaming, and Meta Platform's Facebook Gaming is only down 3.4% year over year. Twitch has more than twice the number of unique channels than it did two years ago, ending Q3 with 10.4 million.
Plus, the upgrade cycle underway in the console market could foretell new sales of game controllers and headsets over the next few years as the installed bases of Sony's PlayStation 5 and Microsoft's Xbox Series X increase.
Corsair Gaming has launched 113 new products this year to serve new players that have come into the market. One of its goals is to expand into new categories to grow the long-term addressable market. The recent launches of the Elgato Facecam and Xeneon gaming monitor represent new category entries for Corsair Gaming, stretching its long-term growth opportunity to the $1 billion-plus webcam market and $4 billion gaming display market.
Pent-up demand is in the cards
Another factor that contributed to weak sales results was the skyrocketing prices of gaming GPUs. The chip shortage has made it difficult and costly for gamers to upgrade, and the holiday season is typically the time of year gamers want to buy a new graphics card to play the latest blockbuster games.
Corsair estimates that the shortage of components has impacted its revenue in 2021 by at least $100 million, or approximately 10% of its revenue so far this year. As a result, management lowered its full-year revenue guidance to a range of $1.825 billion to $1.925 billion, down from previous guidance of $1.9 billion to $2.1 billion.
The good news is that this is not lost revenue. Gamers who want to upgrade eventually will do so when prices come down and inventory is more plentiful. This could lead to pent-up demand being unleashed as soon as the supply chain problems are resolved, which is expected to happen in 2022.
Why the stock is a buy
Analysts currently expect revenue to increase 10.3% this year before rising 8.8% next year. Earnings per share could reach $1.72 next year, which puts the stock's forward price-to-earnings ratio at a cheap 14.5.
Corsair is not only serving the hundreds of millions of people that play video games worldwide, it's also got an overlooked opportunity to expand its product offerings to serve non-gamers, such as content creators and remote workers. Corsair has tremendous growth potential, and that's why the stock is a bargain at these modest valuation levels.