Does Corsair Gaming deserve to trade at a lower valuation than Logitech?
The pandemic has skyrocketed sales of computer and gaming peripherals, and two actions that have greatly benefited have been Corsair game (NASDAQ: CRSR) and Logitech International (NASDAQ: LOGI). These companies are leaders in this growing market and both offer investors similar growth profiles.
Over the past five years, Logitech’s revenue has grown 156%. Corsair Gaming just went through its initial public offering in 2020, but saw a 55% revenue increase 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 from the momentum driven by the pandemic in 2020, Corsair Gaming and Logitech have a bright future in the estimated $ 36 billion computer hardware market. But Corsair offers much better value with a futures price-to-earnings (P / E) ratio of just 17.6, which is significantly cheaper than Logitech’s multiple of 28.9.
Is Corsair heavily undervalued or are stocks a value trap? Let’s find out.
Compare the growth of gaming peripherals
An important factor in the assessment is growth. Faster growing companies typically trade at higher P / E multiples than slower growing companies, especially when comparing stocks in the same industry.
Logitech has experienced the fastest growth in the past two years. In Logitech’s fiscal fourth quarter ending in March, the company reported revenue of $ 1.5 billion at a compound annualized rate of 55% from the fourth quarter of fiscal 2019. Corsair has reported revenue of $ 529 million, a two-year compound annual rate of 47% from the quarter ending March 2019.
However, Logitech’s forecast is for roughly flat revenue in FY2022, plus or minus 5%. Logitech also expects adjusted operating profit to decline from 33% to 37% year-on-year.
This looks small compared to Corsair Gaming’s forecast, which calls for continued growth. For 2021, revenue is expected to increase between 11.6% and 23.4% compared to 2020. Adjusted operating profit is also expected to increase between 14.7% and 24.5%.
It is Corsair’s forecast for greater adjusted operating profit growth compared to Logitech’s softer forecast that may indicate that Corsair is currently significantly undervalued.
Of course, the valuation of a stock is not limited to short-term growth expectations. Over the next five years, analysts expect Logitech to grow profits at an annualized rate of 30% per year, compared to just 10% for Corsair Gaming.
Still, analysts may be underestimating Corsair, given age-old trends in the gaming industry. Corsair Gaming CEO Andy Paul cited trends from the latest earnings report that could benefit the company. for many years :
We are delighted to see that the market for gaming and streaming products continues to grow at such a rate. It’s clear that a new wave of gamers and streamers have entered the market as well as consumers who are building gaming PCs for the first time. Our expectation is that all of these new to the market people will continue to buy gaming and streaming products from us for many years to come.
Logitech is the lowest risk company
Equally important to future growth prospects, investors also place high value on a company with lower business risk.
Logitech sells a much wider variety of products, which lowers its risk profile. It doesn’t just depend on gamers buying new equipment – it sells pointing devices, webcams, and other accessories for people who work from home or need the essentials of video conferencing for the office. . Logitech is also expanding its market opportunities by entering the streaming software services market with the acquisition of Streamlabs in 2019.
Corsair Gaming primarily sells products to gamers, such as keyboards, mice, controllers, and headsets. It also has a growing source of income by selling products to content creators on streaming platforms. Its two operating segments are Gaming and Creator Peripherals, and Gaming Components and Systems, where it sells computer parts for building PCs. The components segment constitutes the bulk of Corsair’s business, but the segment of peripherals for gamers and creators is growing faster and generating higher margins.
Another advantage for Logitech is a stronger balance sheet. As of the last quarter, he had $ 1.75 billion in cash and no debt.
At the end of March, Corsair held net debt of $ 172 million after deducting cash. Management is in the process of repaying its debt, but investors will clearly favor cash-rich activity over indebted one.
Corsair Gaming offers more benefits
Logitech’s product diversity, balance sheet, and superior growth record are likely the reason investors pay a higher premium for stocks than Corsair Gaming. We also have to consider that Corsair Gaming is a somewhat unknown entity to investors right now as it just had an IPO, which is part of the reason why it has a lower valuation.
Good values in the stock market are discovered by thinking about what a company will look like in the future and comparing that to how the market values the stock today. I think Corsair Gaming’s new product launches to drive short-term growth and its debt reduction will go a long way in rewarding the title with higher valuation. As Corsair grows, it will look more like the cash-rich Logitech on the road.
I own stock in Corsair Gaming and believe the stock is a good investment compared to current price points.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.