Chit Chat Stocks - Corsair (CRSR) | Deep Dive

Episode Date: June 10, 2021

Corsair is officially named Corsair Gaming, Inc. The company designs, markets, and distributes gaming and streaming peripherals, components, and systems to its customers. Based out of Fremont, California Corsair was incorporated in 1994. Listen in as Ian, Brett, and Ryan dive into what the company does and where they may grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (1:50) Industry | (6:31) Management & Ownership | (8:34) Valuation | (12:00) Earnings | (12:45) Balance Sheet | (15:37) Our Analysis | (18:29) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode. We got Ian Gray on as usual. We're going to be talking Corsair Gaming. This is Ryan's pick. Another gaming company,

but it's not a video game studio. So it's more of the equipment company. If you've ever heard of Turtle Beach, they're kind of in that category as well. But yeah, we have Ian Gray on. You're coming in from Hawaii, spending an hour on your vacation to hop on this Zoom call. So how's that going? How's the sun down there? It's been nice. It's, you know, mid 80s. The beach is nice. The water's warm. And it's been a good trip so far. Nice. All right, Ryan, do you want to introduce Coursera and then first talk about 7investing? Yes, new recs are out. Yeah, we might be on a time delay here, but we're recording this on June 1st and this is the day the new recommendations came out. Yeah. Any favorites? I like Simon's. Yeah, I do too. That's a good one. Very good

analysis on that one. Haven't read them all yet, but I'm assuming they all have good analysis like always. Yeah. Just use your code CCM. I think you're only going to have like a month left before the prices go up. $10 off. That's right. Use code CCM. But without further ado, Let's get to the show. The company is Corsair Gaming. I want to give credit to the recommendation. We got this one in an email. Max Massetti, thank you for putting this one on our watch list. Corsair Gaming is a leading provider and maker of high-performance gear for gamers and streamers. It's more for competitive gamers, but it's like golf equipment where some of the gamers might not be that good but they're gonna buy the high-end stuff anyways or they want to so they you know

kind of like clubs um but yeah it's like uh microphones that kind of thing and they break it into two categories or they break revenue into two categories um so it's gamer and creator peripherals so this includes keyboards mice headsets controllers uh there's they have microphones capture cards which are like if you're on console you're gonna plug in uh you plug in the hdmi you plug this into the hdmi port so that you can capture the video and have it be high quality footage so you're not like recording the screen if that makes sense um so it's a way to kind of upload it onto your computer and you have a digital version of it um and then there's also studio accessories that kind of thing and so they have 18.3 percent market share uh within that

category and then gaming components and systems is their second category so this is more the high performance stuff and they call it power supply units or psus it's like high-end gaming pcs custom-built pcs the prices can range anywhere from a thousand dollars for these to five thousand dollars some are i think even more than that and if you're thinking how big is like the pc gaming market piece i think there's more than 520 million pc gamers globally 94 million of them spend more than a thousand dollars on their setup so yeah those are the hardcore ones they're really going off to the pure like the esports high players yeah and if you're making the shift from console to pc that means you're probably doing it because you want that much quicker speed less lag time

it's something where you're maybe playing like combat games where you kind of like need the the best connection possible um and anyway anyway they also sell the separate parts uh with that so like parts of the pc uh and that includes like cooling liquid fans additional memory and they have 42 market share in that category so they really are the premier player in pc gaming and then they primarily sell through online retailers or brick and mortar stores although they've said that their goal is to reach 15 of sales through direct consumer channels and they are they have premium pricing so it's not like turtle beach really is sort of the low end type of stuff this is more they can charge what they want they have a bit of pricing power

obviously they can't extend that too much but then they have a bunch of different subsidiaries under the corsair gaming brand so they have visuals by impulse which is uh when you look at a stream there's usually like fancy designs and stuff like that and you've got like the video with whoever the streamer is in the corner that's sort of an overlay visuals by impulse sells those overlays uh so that's more of a digital uh subsidiary and then there's elgato this is what's included in the peripherals kind of a name brand or a name prominent brand in the peripherals market uh scuf maybe it's scuff this is controllers so for like the console market and then origin is the super high-end gaming pcs and then gamer sensei which we'll talk about in the

second half but i'll get into the history custom pcs started getting built in the 90s uh and andy Paul and three other people, three other engineers were in Fremont, California at the time. They started Corsair Microsystems in 1994. And obviously that market has evolved and they've had to sort of pivot what they're primarily selling multiple times. But over the last decade, it's kind of been more of the same stuff, more of a permanent business. And I'll also say Andy Paul is kind of a pioneer in this industry. Eagle Tree, which is the private equity firm, bought a majority stake in 2017. Since that time, Corsair has done a lot of acquisitions as well. They've really taken off. I mean, esports as a category has really taken off over the last

decade. So they've kind of been a beneficiary of that. They went public in September of 2020. I'm sure I'm missing a lot of history there, but Andy Paul was kind of, he was always in this industry. He has a degree from physics from like University of London, kind of a bright guy. And he's been kind of committed to this for 25 plus years. Yeah, that was a good overview. And yeah, they do make a lot of small acquisitions. I'll hit the industry and composition quick. I mean, they have multiple product segments, so it's kind of tough to judge. And they do identify like a $40 billion TAM, but when looking at their market share that they weigh out, I don't think those two numbers match up. So I'm going for the $6 billion market opportunity.

that some third-party source says, and that is for the gaming accessories market. So they're expecting that to grow to about $6 million by 2024. And that is for really the peripheral stuff. The gaming components is slightly smaller. As you can see, they already have almost 50% market share. And Ryan will get into the earnings later. It's not that large of a market, but it's a pretty sizable one. Competitors include Logitech, Turtle Beach, Razer, HyperX, and then a lot of there's smaller brands some of which corsair has bought up and then dell and hp are competitors within the gaming pc division uh but really like the main i guess we'll get into the main ball cases the peripherals and the non-like uh chips and stuff like that and then another

indicator i think would be to track the rise in esports as well that's a market that's growing at a double-digit rate or at least has historically a lot of predictions are that it's going to grow you know, a size, a 10% rate or something like that over the next decade. Uh, so really big tailwind for this company. Um, Ian, do you want to hit management? Yeah, I'd say the primary competitor. Uh, I mean, there are definitely overlaps with all these smaller brands, but the primary competitor is probably Logitech because Logitech also has, uh, stream labs, which is like the primary OBS, uh, software. So it like combines a lot of the streaming different it's the primary streaming software even though uh corsair has their own which is like iq

icue so they kind of compete on that logitech is also kind of the cameras they they're really focused on the streaming yeah logitech is the keyboards and then turtle beach is bigger and some other stuff like um headphones microphones stuff like that so yeah you need one head management and ownership. Yep. Andrew Paul, as Ryan mentioned, also known as Andy, co-founded Corsair in 1994, and he's still the CEO today. He owns about 4% of the shares outstanding. His compensation in 2020 was almost $3 million, which is a bit high for companies particularly of this size, but nothing absurd, at least in my mind. Traditionally, it was closer to kind of $1.5 million. The CFO, Michael Potter, he was just brought on in 2019, I believe. And he's

worked in a variety of CFO roles over the years, most recently at a large pension fund and then Canadian Solar. So he's a professional CEO or CFO, was brought in to, I'm sure, just kind of add some credibility as they went public. I do like in the earnings call, he gave very detailed and thorough forecasts, which maybe gives me a false sense of security. But I also enjoy when management gives a lot of guidance across a variety of factors, because it makes me feel like they really know the business and have a plan, whether that's true or not, who knows, but it kind of, it definitely gives me gives me that feeling that they know what they're talking about. And so they gave a lot of guidance on capital expenditures and revenue growth and all sorts of

stuff. Another member of the management team that's worth pointing out is T law, who was recently named president back in January. She's served as COO since August of 2013 and owns nearly 1% of the shares outstanding. I point her out because Andy Paul, I think is 64 years old and might be nearing retirement. I'm not sure about that exactly. But she seems like she's kind of getting positioned and groomed to become the successor potentially. So that's someone if you're going to invest in this company that you should get to know a little bit. And then finally, I mean, maybe the most important part of this is, as Ryan mentioned, the private equity group Eagle Tree bought Corsair back in 2017, I believe. Right, Ryan?

Is that the year? Yeah, I think it's 2017. And they currently own about 67% of the company. So they are the very major shareholders here. They're the controlling shareholders. It's a little unclear. presumably they're going to get out of their position over the next couple of years, but it's unclear exactly how they will get out and how fast they'll get out.

It's made a variety of investments over the past 20 years. I didn't really recognize any of the companies it was investing in, mostly their mid-market companies. And one I did recognize though is Odwalla, the juice brand. They owned that from 2000 to 2001. So kind of just a random little tidbit there, but they focus on three segments, consumer, media, and business services. and water and specialty industrial. So they really, like I said, they really focus on those mid-market acquisitions where they can launch new products, make add-on acquisitions and enact operational improvements. And we've definitely seen with Corsair, a lot of focus on new products and these acquisitions. There's been a lot of acquisitions over the last couple of years since

they made, since Eagle Tree invested. So definitely want to get comfortable knowing that how much they own and whether you're comfortable with that moving forward. Yeah, if they end up, there could be, you know, just after the IPO, the lockup period, there could be stuff like that. They might end up selling a big part of their stake, but who knows? Who knows what their plans are? I'll hit valuation. Market cap right now is about $2.88 billion. Ticker is CRSR. Enterprise value is slightly higher at about $3.08 billion. And with this company, I think it's a better measure because they really just have some standard debt on the balance sheet. And they're going to have to pay that down. I believe it is

in 2025 that that is due. But I guess Ian will probably get to that later. EBITDA sales 1.6, EBITDA gross profit of 5.6, and then EBITDA operating income of 14.3. Not much else to say there. I guess they have pretty good conversion from operating income to cash flow. Yeah, very simple, reasonable valuation. And we'll probably try to identify why that is the case later in the episode, Ryan, what's the earnings? Yeah, they have $1.9 billion in trailing 12-month revenue. That's up 65% year over year. Peripherals is sort of their higher margin revenue category. It's not that much higher margin. Obviously, they're still manufacturing these goods and selling them, but it's, I think, got 10 more, maybe a thousand more basis points on gross

margin. But that grew by 132%, whereas components and systems grew by 52% in the most recent quarter. The trailing 12-month gross margin was 28.5%. This has expanded over time. I think they've done a good job being able to raise prices. And then that also came a bit from the product mix, just being that more of the sales growth came from peripherals. And then they had trailing 12-month operating income of $216 million. That's up a lot from the year before. It's like a 4X or something like that because they weren't quite as profitable prior to COVID. And then operating cash flow and free cash flow for the most recent quarter looks a bit depressed because they have a higher accounts receivable. And right now inventory is a bit constrained due to this chip shortage.

But normalized, it looks like free cash flow margins are about 10%. And they're adjusted operating income margin, which I think is actually, usually I'm not a fan of adjustments, but I'm okay with this one because the primary expense that they back out is amortization of intangibles, which is kind of hard to justify or kind of hard to really analyze. And that's about 15%. So that's kind of what you're looking at. I wouldn't say that there's no crazy operating leverage in this business unless some software component becomes a big part of it. So 15% is probably what you're looking at. And then as far as guidance goes, well, there's barely any stock-based compensation. I should add that as well. And then guidance, they raised guidance

in the first quarter. They're playing it pretty slowly because there's a lot of uncertainty around reopening. But at the mid-range of their guidance, they're projecting for 18% revenue growth in 2021 and 20% adjusted operating income growth. All in all, they've had a huge boost from COVID. And I think what they're going to do is keep playing it conservatively and then just keep upping their guidance with each incremental quarter uh as this year plays out because this guidance is wildly conservative when if you're looking at 20 overall revenue growth for 2021 when they just had 75 or 72 revenue growth that means they're expecting a huge reversion i think they're and the analysts talked about that on the call they're kind of just playing it safe yeah it

doesn't make sense for the commodity issues and the theme there's a lot of theories out there that gaming is going to get a slowdown from its 2020 boost. But time will tell if that's the case. Ian, you went ahead and balanced sheet, pulled out the first half. Yeah, they've got cash on the balance sheet of $125 million, inventories of $234 million, which is up from 2020,

but they do have higher inventory turnover and the inventory is like down as a percentage of revenue, basically. They've got over $550 million in goodwill and intangibles, which Ryan touched on a little bit that they're amortizing down those intangibles. It's to be expected given the acquisitions. It's a little bit high. It's 30-some percent of total assets. So write-downs could be an issue. But like I said, they're amortizing intangibles down over time. So that shouldn't be a big concern.

And then debt of around $300 million, as Brett was alluding to. They expect to pay down an additional $70 million-ish this year. They used the $28 million in operating cash flow from Q1 to pay down debt. And so that's something that one of the strategic initiatives they're working on is reducing the debt on their balance sheet and getting it down from this year, starting at about $325 million down to about $225 million by the end of the year, which makes an impact. They said that even just the $25 million, they reduced it. And, um, uh, Q1 reduced interest expense by about a million dollars for the quarter. So, um, it's having an impact. They want to get, they feel like some of their, um, they're not being rewarded for the quality of the business because they have

too much debt in some cases. So, um, the final note I'll make on that is it's kind of complicated exactly what the interest rate is. There's a bunch of different options they can use for their interest rate. But in 2020, the effective rate was 6.45% on the vast majority of their debt. So fairly high interest rate debt in this environment, which is probably another reason why they're trying to pay some of it down. Yeah, it looked like it's a variable rate. And so there is a little bit of... There was a ton of variables in there too. It's hard to... It was like LIBOR. I thought it was LIBOR plus one. No, there's like... Well, it was like LIBOR plus one plus an additional thing,

or they could do this other one and they could choose which option they wanted. So it's variable rate. Currently it's about 6.5%. I just read the average and I was like, I'm going to go with that. I'll just take the average. But I mean, that interest expense has been high,

so it'll be good if they can pay that down for sure. I mean, they could probably refinance even and get some better debt right now. Yeah, I think there is a little bit of interest rate risk there having to be variable rate. So paying it down earlier rather than later, it's probably a good thing for them. Um, but also I'm not opposed to them having debt if it's like lower rates.

Yeah, they can get better interest rates, but I mean, this one looks like they got it back when the business wasn't as high of quality. So hopefully they can either refinance or just clear this up and run with a clean balance sheet. All right. That's going to be the first half. Let's do an ad break and we'll have the second half of the show. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices.

You'll get real-time alerts. oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back next up we got product experience? Ian, you want to kick things off with this one? Sure. So I was actually just talking to my cousin a couple of weeks ago and he recently built his own PC. And so when we decided to do Coursera, I was like, huh, I wonder if he actually used any of these. And he just texted me actually

while we were doing the show and said that it's a pretty well-established vendor. He ended up getting some case fans from them and then a lot of peripherals, so a keyboard and a mouse and a few other things. And so his experience was positive. He was kind of looking for, when we were talking about him building his PCs, he was looking for high quality stuff, but at a reasonable rate as well. And so he didn't want to totally break the bank building his rig out. So it seems like everything we're reading was his experience with them, that it's high quality, but not super expensive. Yeah. I think with the PC market specifically, you kind of, if you're building a custom pc you're going to go through of course they're probably one way or

another um and then i have a friend uh who does like streaming and he's kind of like an esports player uh but he's on console and he even he said like with a lot of elgato stuff which is one of their subsidiaries is designed for console and they said he said the hd60s which is like the capture card it's kind of a must-have if you're trying to stream um and then there's other stuff as well but he uses stream labs as the obs software or the stream you want to explain what that is again that's a little complicated yeah you're you're running a whole bunch of different systems um and you have to connect a bunch of different things as well so you have like lighting microphone volume display and you want it all kind of from one uniform platform

you want a software that can kind of control all that uh corsair has one but i think stream labs sort of the industry standard okay okay and they should they bought stream labs or no logitech yeah i'm not exactly sure on market share but i know iq does sort of the same thing and then elgato introduced the stream deck which is like a hardware it's almost like a tablet for it where you can like control your different uh whatever systems or production parts um kind of with the tap of a button um so that's grown pretty popular as well but and he said he's buying that but it will be uh it's like supply constraint okay okay that makes sense um i got nothing i had nothing really important to add there so competitive advantages ian what are your thoughts on uh

this recourse there well i'm stealing yours a little bit here brett but uh it's a little different they have tremendous market share right now across their uh the products that they sell And so getting to that dominant position for companies generally creates pricing power, the ability to sell more tangential, even peripheral products, improve logistics and supply chain generally. So having the market share position, they are the big dog in this market, you know, is to borrow a term from David Gardner. They're the rule breaker. They're the top dog. So that's I think that provides a little bit of a competitive advantage for them moving forward. Okay. Yeah. And to be clear, they're the big dog in the components, but it's a little bit more I mean, there are some complexities to scaling like a manufacturing business.

So I guess you could call that a brand. No, it's just like software. You ever heard of a company called Tesla? Yeah, I guess. Sorry, you're right. But I guess my competitive advantage, the brand makes it easier for them to kind of move into uh different product categories as well i think they launched 28 new products or something like that in the first quarter which was kind of bothering me they don't need to do a press release for every new product launch but then also there's this one i guess you would call it kind of a network effect but lighting is like a big thing for streamers and they have like

distinguishable lighting it's kind of like this weird rainbow type color purple and yellow that's right? Yeah. And so, you know, what a Corsair item is when you're watching a stream. And so that kind of creates like, oh, he uses Corsair, like, oh, I like that streamer, he uses it. So it's kind of an advantage, I guess, in a sense to have that distinguishable feature versus maybe some other kind of more run of the mill products. Yeah, like a turtle beach. Yeah, that leaves right in mind as well of getting people to look at other people playing with Corsair. And that's the brand equity with consumers that's the big one for just a consumer brand like this um i think as an investor you really got to try to look at it in the same light as a nike or a lululemon something

like that but think all right this is could it be the nike or lululemon for esports or whatever other analogy you want to use they're going to probably sign big esports gamers hopefully if they have millions of people watching their streams or you know whatever on-demand videos Corsair, you know, they see people using Corsair, it's just like people wearing Nike shoes or Nike cleats. The biggest research task I think I would be doing if I was considering an investment in this company is to identify if they are the Nike or if they're the, I don't know, what's like one of the fourth rate Pumas, you know, you know what I mean? Because Nike has been one of the best investments of all time. I think Puma, you know, it seems like a fine business, but, you

know. Yeah. I don't really know much about Puma, but maybe that's the point. All right. Future growth opportunities? Ian, what are your thoughts here? For me, the major growth opportunity is gaming content. Between Twitch, podcasting, YouTube, they're really providing the tools and the software to monetize your gaming through content creation. And I think that's where a lot of the growth in both, whether it's actual the PCs that they're building and buying, or whether it's more of the peripherals and the lighting, as you were mentioning, and some of the software components i i think there's a lot of growth in that industry and just as more and more people realize wow i can game and make money off of it um i think that's going to provide a lot of tailwinds

for corsair yeah and those competitions the the big competitions as well uh sponsored by all the the different games like call of duty wiggle it and stuff like that um ryan what are your thoughts uh the gamer sensei acquisition so they acquired this back in october of 2020 uh it was called an immaterial amount on the 10K. But they're basically, I think they really got it for the tech and they're trying to sort of totally redo it. And so if you don't know what it is, it's an esports coaching platform, which I know might not sound like a huge market, but you'd be surprised. And so let's say I wanted to get better at Rocket League, I could go in, I could pick that game. You could pick other ones like League of Legends or

Call of Duty or something like that. And then it gives you a bunch of different coaches and different prices you could pick one get a one-on-one session uh but it's kind of like fiverr in that sense but uh they said they have and they talked about this on the conference call they said they have big ambitions to kind of change this um so they're going to do like master classes camps and then they're going to change the coaching roster because they have like a huge influencer network whether it's through elgato visuals by impulse uh or even like some of their pc gamers yeah yeah it's just like big youtubers twitch streamers all that kind of stuff they if they can really if if people are able to get one-on-one sessions for 150 or whatever with

their favorite streamer i think they'll do it um and so i think there's definitely some value in that gamer sensei acquisition and this is kind of pie in the sky but let's say the uh game coaching worked out, there's a lot of other industries that I think coaching could apply to if that platform works. Yeah, I guess that's, yeah, that's a little, yeah, that's a little out there, but it's possible. It's possible. All in mind, I think it's the rise of, I don't mean that. No, it is. It's kind of a way down. That's pie in the sky. Yeah. All in mind is the rise of e-sports. This is the big one that we talked about, kind of an ancillary growth that'll help grow the, you know, the parts market and the

equipment market and the gear market so this could mean sponsoring events getting big players to sign with corsair like i mentioned earlier and theoretically that convinces everyone to use their products as well i was just thinking you know why don't we just the ceo could probably just read shoe dog and then just copy what nike does because no one has done this in this market yet now maybe they have and i'm not really sure of it but it seems like investing heavily into this what you call you know aspirational marketing would really help them dominate their position i mean just look at yeti peloton all those type of companies that can charge what you would think is just a commodity for like three times the competitors i mean that's got to be the opportunity

here or else it's just going to be a commodity business and never really generate that much profits so all right highlights on low bites ian what are your thoughts here for me the highlights are their strong market share. And as we've talked about, it'd be great if they could grow that even more, but 42% market share and PC components, 18% of the peripheral market share. So even in the peripherals of very high market share, they're paying down their debt. Um, and just a lot of industry tailwinds, as we've discussed for me, the low lights, um, and their 10 K they mentioned that Amazon accounts for about a quarter of their sales. And so, um, that's, that's a big portion of their sales. I don't think that is a huge risk, but it's something to be

aware of. And then their 10 largest customers account for over 50% of revenue. And so that means all the retailers they're selling through, and they've made it a stated goal that they're trying to get to, I believe, 15% direct-to-consumer sales in the next couple of years. And so they're trying to kind of... What did you say? It does feel like a small number. I think I read that they're at 10% or 11%, 12% today. And so it's actually not that much of an improvement from there and it seems like that's really one route for them to go to improve margins too is the more they shift to direct to consumer in theory uh they're higher their margins that uh the higher margins they should be and then the last low light for me is just a considerable amount

of debt and high interest rate debt so they seem to be focused on paying that down which is a highlight but uh there still is quite a bit of debt yeah it'll take them a few years to do that unless they unless they start growing a lot more rapidly um ryan what do you have for highlights all its highlights for me they i mean the the premier brand in uh a big industry in my opinion and a growing industry and then i also think andy paul uh i watched a few interviews with him he's very uh he's what you want in a ceo and he's also very committed to this i think he's proved that out through being there for 25 plus years um i would also say there are in this industry tailwinds not and i know people say that all the time but twitch and youtube do a lot of marketing

almost for them because you can watch your favorite streamer and then you go okay that's what they use i'll use that um and so that just gives them growth without them having to put capital into it well i think they gotta just to push back a bit i think they have to invest in the athletes to get that to be the differentiated brand they're gonna have to what do you mean invest in that like uh the big time streamers they're gonna have to pay them just like nike does you know pay them for to use to use their products and it seems like that's the rational end state of this market um yeah i think people on pcs are using them naturally so i don't know if they have to

necessarily pay them to do it but people naturally wear nike cleats but they still Yeah. I guess there's that, uh, but low lights for me. Um, the timing seems a little like capitalizing on a good year, uh, the timing of the IPO. Um, but that's the good time to do it. So it's kind of like, well, and they raised that money to a really high price. That was smart to see if financially it was secondary yeah that is secondary at 35 a share this winter which i thought was smart interesting uh i didn't see that but then i guess the other one guidance was really conservative there's some uncertainty around reopening but i would i'd argue that a lot of that's overblown i'd be more concerned about supply constraints than someone that just bought

five thousand dollar pc custom built uh i think he's gonna stick he's gonna make the incremental investments to get the fan case the cooling liquid uh i still don't think maybe it isn't as much growth but i don't think there's gonna be a massive reversion and even if it is i think it'll be temporary because the industry at large is growing and and these these gamers aren't um these aren't the gamers that picked it up in 2020 just bought a nintendo switch and played one mario game you know these are the these are the big-time gamers that have probably been doing it for five years or something like that so that i think that narrative especially like for gaming as a whole it makes sense a bit but for this niche i think it doesn't make any sense and what are your thoughts

yeah i was just gonna add they talk in their investor presentation and on their calls about the third world that they see people spending time at home at work and that gaming is really becoming the third place that people spend time um and in these virtual worlds and so like you were saying those for those high-end gamers who really enjoy gaming who that's the big thing for them um it's part of their life and just because we're going back to normal doesn't mean they're not going to at least in my opinion doesn't mean that they're necessarily going to stop gaming right it's um there's still going to be plenty of time for the third most important thing in their life if it's even it may even be higher than that for them but no yeah yeah that makes sense

that makes sense um all right i'll hit my highlights i think there's definitely a path like mine mentioned, to 15% free cashflow margins, those working capital things, you won't get that double headwind like they had typically. And if they do, that's just, I think that inventory management and accounts payable and accounts receivable management by them, I think they have solid brand equity. But again, that's something I'd want to investigate further. And then big industry tailwind, very simple, but I mean, that's a recipe for success for a lot of investments low lights for me um there's a potential for durability risks that they highlight in the 10k if cloud gaming becomes mainstream and if it basically has the capabilities

what netflix has that means all the equipment sales outside of like a keyboard mouse headphone video camera stuff like that all those um chip components are basically going to be gone there's going to be no market for them they highlight that as a long-term risk got it's probably going to be a few years at least before cloud gaming becomes mainstream and maybe it never does but that's something to think about um there's also the new consoles and big vr investments that could make pc games lose market share again because they've kind of had a resurgence over the last you know five ten years here um and then there's also the commodity price stuff so they ship everything from asia we've seen everything from semiconductors they are at a risk

of commodity prices going up. Hopefully, that's just a short term concern though. Yeah, I'm not sure that cloud gaming would have a huge impact on peripherals. No, I asked him saying that it's just for the person saying like, there's still going to be keyboards, mice, headsets, but if all the I guess I'm just going to use the word chips are in data center, then that part of the business is gone for. yeah i i i think there is some people that kind of overblow the risk of cloud gaming like wiping out consoles and pcs i don't believe in cloud gaming but i i could see a i could see a world in which pcs still have similar market share within 10 years yeah these are the risks they

highlight so i thought i wouldn't you know if anyone is a big believer in cloud gaming corsair might be kind of an interest you know you might not like corsair i don't know yeah all right more or less interested in i'm more interested this is definitely one that caught my attention and i'm going to be doing some more digging on and looking looking into um for me the story comes down to if gaming is going to continue to be as big of a part of people's lives or close to it as it has over the past year um this is going to be a winning investment if it if it's not then then i think there's a limited downside here just with the with the place that the um the multiples are at it's it's there's there's some margin of safety here um it's it's definitely something i'm

more interested in yeah right more interested uh i like the core business i like management i like the industry that they're in uh and then i think they kind of have some call options with the gamer sensei stuff um visuals by impulse was probably won't be hugely material i don't think um and it's a good price uh operating income multiple of 14 times is well below uh industry average yeah so yeah lots to like yeah i'm more interested uh valuation solid i would argue that this isn't a business that deserves a premium multiple but it's way below the market so you know i guess be your own assumptions there this isn't i mean what what's it come this isn't visa you know this isn't something like that it's not a great business there are risks to commodities

they have to nurture the brand and probably spend a lot on advertising each year but who knows maybe maybe they won't have to um i don't like the components part i'd honestly just want to invest it's probably based on this peripheral stuff that seems like the golden goose here uh but i don't know that the components just didn't seem like a high margin business at all i think it's fine but you know i think that is is influential on the peripheral sales uh and like sustaining the brand yeah like because it's hard to engineer that stuff and and they no being known as the premier brand helps like i mentioned enter like oh okay it's corsair i'm fine yeah you know yeah uh safety blanket yeah yeah there's no room to do it or sorry there's no

harm in doing that that's positive uh gross margins but yeah one of the things they point out too is when they see a large uptick in a lot of the component sales they'll see um follow-on sales of peripherals over the next 12 months that and then this past this past year they've seen a big increase in the number of uh pcs that people built that are over two thousand dollars and so they're expecting over this next year they'll see a continued rise in peripheral um sales which they saw in q1 and it's there's as we've talked about there's a big question about how how long can they sustain um pretty high revenue growth but um i think there's as ryan was saying i think there's some good kind of um complementary effects of having both businesses but um that's time will

Yeah. And the other thing that's worth noting is the components and systems manufacturing is done in Fremont. The peripherals is done in Taiwan. So it's most of the chip stuff is domestic. Yeah. Well, it's just, it's further down the supply chain. Right. All right. And I guess I just, one last thing to highlight is that, you know, know if you believe like that the company is going to grow revenue like all right what they grow some of this peripheral stuff at like 70 80 100 or whatever yeah i think in q1 it was 130 yeah if you think over the long term they can compound it at like i don't know 10 15 because that's what you want to underwrite the multiple it it's hard to argue you did multiple compression it's always

possible but with this business you know it's hard to argue with that so that's just one more note as we leave off. Ian, we got stock for next week and it's your turn. So what's your pick? I'm picking Sharpspring. It is a small cap that competes, as far as I can tell, I don't know a whole lot about the business, but it competes with HubSpot, I think. We'll take a deeper look into it, but it's under a $200 million market cap has declined about 50% off its February highs. So I thought it would be interesting to take a look at. Okay. So it competes with like Salesforce or it's kind of in that arena a bit? Kind of. I think it's less complex than Salesforce. It's more focused on email marketing, I believe, but I don't really know too much about

it. So we'll have to dive deep on it next week. All right. It should be fun. That's going to do it for this episode, guys. Thank you all for listening. Remember to use our code CCM to get $10 off your first month at 7investing. We are not financial advisors. Anything we say on this show is not formal advice or a recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening.

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