Corsair Gaming (NASDAQ: CRSR) is a world-leading developer and manufacturer of high performance computing equipment aimed at gamers. The company has recently come to the attention of Reddit traders, due to its outstanding 24.8% short interest.
As my trading strategy involves holding my stocks for at least five years, I prefer to ignore meme stocks unless I think they have good underlying fundamentals. And in the case of Corsair Gaming, I think it could have similar potential to Blackberry.
The good news
Earlier this month, Corsair released promising Q2 results. It reported revenue of $473m, an increase of 24% year-over-year. The company is experiencing record demand for its products, including its innovative Facecam aimed at professional streamers.
CEO Andy Paul stated “After people learn to play PC games for a while and get good at them, they start to want better specialised gaming gear.” This suggests that not only is Corsair gaining new customers every month, but its current customers will continue to want to spend more. He went on to say that “the market is still at an early stage and the penetration is so low.” This means revenue could continue to skyrocket.
The company also saw an improvement in gross profit margin, due to higher sales of specialised gamer gear. CFO Michael Potter said that “we continue to see a mix shift as gamer and creator peripherals contributed 41.9% of total gross profit in Q2 2021 as compared to 36.9% in Q2 2020.”
Statista estimates the global gaming market to be worth $138bn in 2021, up from $93bn five years ago. There’s clearly huge potential for this growth stock.
Chip shortage
Semiconductor (chip) shortages for CPUs and graphics cards has meant that Corsair has struggled to keep up with demand for its high end products. However, the outlook is improving.
Advanced Micro Devices (NASDAQ: AMD) is a key microchip supplier to Corsair. During the pandemic, it had to prioritise core computing services over high end gaming. However, last month its CEO Lisa Su stated that there would be “more output every quarter,” with supply issues likely to be resolved in 2022.
This represents both risk and reward for Corsair Gaming. Its CEO thinks there’s “a huge amount of people waiting in the wings to build, as these cards start to become available.” The risk of course is that the chip shortage takes longer to resolve. Global car makers as well as Apple have had to cut production drastically. Sony‘s flagship console, the PlayStation 5, has become almost impossible to buy. And there’s no guarantee that the chip shortage will be resolved within the year.
Corsair Gaming risks
The company has come under fire over equality issues. There’s only one woman on the board, Diana Bell, who previously worked as Senior Vice President at Hewlett Packard (NYSE:HPQ). Corsair may face backlash from alienated female gamers who could choose to take their custom elsewhere. As the pandemic concludes, it’s also possible that consumers may be less likely to game. And the high short interest means most hedge funds are betting against the company.
However, with an estimated 2021 price-to-earnings (P/E) ratio of only 16, Corsair Gaming is a high potential growth stock I’d add to my portfolio.
