In this episode of Industry Focus: Consumer Goods, join host Emily Flippen and Motley Fool contributor Asit Sharma as they break down a provider of tech gear for professional and amateur gamers alike. Corsair Gaming (NASDAQ:CRSR) is one of the newest and most exciting plays in the world of high-end gaming.
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This video was recorded on January 26, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, January 26th, and I’m your host Emily Flippen. Today, Asit Sharma and I are taking a deep dive into the world of high-end gaming and talking about a unique business that recently went public, Corsair Gaming. Asit, welcome to the show.
Asit Sharma: Emily, thank you as always for having me.
Flippen: Yes, Corsair is a really interesting business and this has actually been a business that I’ve been intending to talk about on the show since its IPO late in 2020. I have a group of friends that I have increasingly been remote gaming with. This was a business that when it went public, it was the entire talk of my gaming friend group, because they are all so aware, and I being the lackluster gamer that I was, wasn’t as aware of this business. But Corsair is a provider of high-performance tech gear for gamers. They sell things like components and streaming peripherals to both professional and increasingly amateur gamers. It’s definitely an interesting business, obviously had a great 2020 as they’ve all been playing games a little bit more often than we were maybe in years past, but I’m excited to dig into it with you today.
Sharma: Yeah, let’s dive in. I should say though before we do, I got to ask, what is your favorite game that you play in your gaming group?
Flippen: That’s a really good question. This is a little bit embarrassing to admit. But recently, probably for the past three or four months, we’ve been playing a game called Killing Floor 2. It sounds very aggressive. It is a little bit aggressive, but it’s essentially a team-based zombie killing game and it’s not typically something that I would play with. I grew up playing things like The Sims and Rollercoaster Tycoon. I still like management style games. But there’s something really cathartic to me about having a long day at work, maybe getting back from the gym, and then having the opportunity to sit down with some friends and just kill a bunch of zombies.
Sharma: That is so awesome. We always discuss this. I’m a slightly older generation, not that old, but slightly older. My gaming experience was a tied generation of games, Asteroids and games like Defender. I’m actually the zombie that you’re trying to kill. I think I’ve reached an age where rather than kill zombies, I’m that person that’s on your screen. But anyway, onto business. Emily, can you give a little background on Corsair and then we can talk about the business model, etc.?
Flippen: Yeah, please do. I know nothing about the background of this business. I’m excited to hear it.
Sharma: I have just learned, although I will talk about it a little later, I have been introduced to Corsair by someone I know a few years ago. But really didn’t understand anything about the business model. Pretty interesting. This company was founded in 1994 and one of the three co-founders is still around. This was originally called Corsair Microsystems. It was known in its first year as a manufacturer of computer components. So, this is memory, liquid cooling systems, all the kinds of maybe boring stuff to me, but really exciting stuff if you are a do-it-yourself PC builder. They noticed as they were growing that a lot of the stuff that they were making was very good for an adjacent industry, which is the gaming industry. In the mid-2010s, they decided to tap into this gaming market. Corsair went ahead with developing a product line that was centered around gaming. This included branded PCs and peripherals. They were really engineering focused from the beginning, Emily, so they had much respect in the do-it-yourself PC community when they actually went into gaming. Really instant bonafides, and that allowed them to tap into what’s become the huge market. We’ll talk about the size of that market as we go on.
So, they actually had to recreate themselves as an edge year company from Corsair Microsystems, they became Corsair and then Corsair Gaming. They built their marketing focus as it shifted gears around this idea of a company that would appeal to younger people generation, they changed their graphic design, made themselves look like a much younger company. In fact, I was surprised to find that they’ve been around for so long.
Flippen: I don’t think it’s often that you see tech-enabled businesses that have such a loyal customer following, such a strong brand that is also so old. I mean, this is really a business that seems to have reinvented itself. You still see that today. Reading through their S-1, admittedly, the S-1 is a little bit old now. I think they’ve had a quarter or two, possibly. I think it’s just one quarter, they reported as a public company since going public. The S-1, well, still relatively up-to-date. Admittedly, it’s not as up to date as if we are getting too right when it was released. But one of the things that I noticed when looking through their S-1 was just how dependent they are. Maybe dependent is not the right word. Maybe reliant is a better word. They’re reliant upon loyal customers to maintain their market position. They’ve got into really strong and competitively dominant market positions. Virtually, all of their initiatives and part thanks to the brand awareness and reliability of their products from gamers. When you think about what’s important to a professional and even an amateur gamer, things like speed and reliability, these are things that really matter. When they’re talking about spending upwards of hundreds, even thousands of dollars on components for their computers to improve their game or their streaming accessories, it’s really important that they go with the right brand. Corsair has that long standing reputation. So it’s really been beneficial for driving users to their products.
Sharma: Yeah. I think that this is something that when you look at this industry a little bit, you will see that there are just a few major players. We know there’s a company called Razer, which trades out of Hong Kong, R-A-Z-E-R. There’s also Logitech, which is known for making a bunch of peripherals. Then as you go on, there are many more smaller companies and even boutique companies that make gear for gaming. While it’s a growing market, there has been room for this company to muscle in and get some market share.
Flippen: When you look at, I guess, what drives their business, that drives the revenue, it’s really just to the main gear group. They have what they call ‘components and systems’ as one group, and then ‘peripherals’ as the other. When you look at components and systems, these are memory chips, things like RAM, computer cases, power supply units. As they broke it down their S-1, they have the dominant market share, and virtually every single component and systems secure group that they offer. Then when you look at the peripheral, so keyboards, mice, headsets, streaming gear, they are increasingly becoming dominant. This is in part thanks to acquisitions. But they are trying to develop an entire suite of products that can really serve somebody who is doing it, whether they’re streaming Killing Floor 2 after work like I am, or if they’re all day, or 9-5, or 9-10, whatever it may be, streaming for a live audience.
Sharma: Yeah, Emily. This is something that both entices me and gives me pause. When we were researching this episode, you pointed out that in the peripherals market, so we’re talking about keyboards and mice, things like that, Corsair has expanded its market share from 5% at the end of 2013 to over 18% in 2020. In the components market, so this is memory cards, power supplies, etc., the company has grown its market share from 26% in 2015 to 42% in 2020. So on one hand, that is really amazing and it’s incredible that a company would have, let’s say, 42% of a market. That is a huge number in any market that you are going to play in. But it also makes me think, well, how much more is there for Corsair to grab? I mean, it already has the No. 1 position in all these different categories, and if it’s not No. 1, there are fewer words like No. 2 or the words No. 4. I guess it’s something that we can break down a little further as we go on, but it was one of the things that made me wonder, as an investment, how much growth is there for this company?
Flippen: Yeah, that’s a really fair point. As you mentioned, when we get to how their revenue breaks down, we will dig into those numbers even deeper and further highlight maybe the lack of growth opportunity. There isn’t, there are certain verticals. But it is really impressive and it does mean that, OK, once during that dominant position, sure, the only place to go from No. 1 is down, right? But you can also leverage that No. 1 position to get new products, to just expand the number of verticals you offer. One of the ways that they’ve been doing that recently is getting into software suites. I got really excited when I saw this in their S-1, because as we had mentioned up to this point, Corsair has really just been a hardware play, which is a good business, but it’s a low-margin business, the hard business to really scale the way that we’ve seen some of these like crazy tech giants with scale. The gross margins are inevitably going to be lower.
When I saw that they had two different suites of software products, IQ, which is software aimed at casual gamers, and then Elgato, which is software that they acquired that’s aimed for content creators, the first thing that’s started going off my head was subscription revenue. This is great. Software, high-margin recurring revenue. It’s just not bad. They’re actually just one time sale products, which to me is a little bit of a missed opportunity. But the more I dug into the suites of software products, the more I realized they’re really compelling. They’re not for everybody, but for somebody who spends a lot of their time gaming or streaming or being a general content creator doing this for a living, it’s really hard to avoid products like Elgatos, especially things like streaming decks, which has basically become a necessity for professional streamers. While there is no recurring revenue and that makes me sad as an investor, I will admit they also seem to be doing a good job of getting that same brand recognition in software products.
Sharma: Well, this is a really good way if you already hold the market to expand what you have, especially through customer loyalty and if you’re marketing to those who are pretty sophisticated. So maybe starting with Emily, if we just think of a pyramid of gamers. Maybe Emily is at the base. I’m guessing you’re not really hardcore in gaming. But I may not, Emily, you might be doing this six hours a day.
Flippen: I wish I had that much free time.
Sharma: I know. But we look at going up the pyramid where there’s a smaller number of people that are the true enthusiasts and geeks, I’ll say that in a nice way, who really can build their own computers and create their settings and games, those are the ones that often can help bulk up that lifetime value. If you’ve got the market, but you’ve got a lock on people who are going to be spending as a lifetime customer, an enormous amount over the years, I think that’s a pretty decent way to build your business model. Especially as you mentioned, the company isn’t afraid of acquiring these pieces, as you mentioned, Elgato, that is an acquisition. Just want to point out here, we won’t talk about all of them. But Corsair is a serial acquirer over the last few years. They’ve acquired about three companies in short order to help flesh out their product line. I like that. I think that’s important and necessary to keep grabbing more out of your customers. If you’ve got the market share, keep extracting more from those regular purchasers.
Flippen: Yeah, that’s completely fair. I think the downside of their acquisitive history has just been the amount of debt that they’ve ended up loading on as a company. It makes me a little bit nervous. On one hand, I recognize that Corsair, in order to not be that 20-year-old hardware play, in order to be the next-generation of both software and hardware for gamers, in order to get to that point to justify its valuation today, to make me, as an investor, want to buy, they probably need to be acquiring or at least pumping a ton of money into research and development to find the next best thing that’s a necessity for gamers. I recognize that in a logical sense, it makes sense that they’d be taking these news, but financially, it’s hurt them. I think Corsair has something like $300 million or nearly $300 million in net debt. That’s after their cash, and a large portion of their operating income is taken out by interest payments, which is something I noted.
Over the past 12 months, 30% of their operating income went to interest payments on their debt. Presumably, this is relatively high interest debt they’ve taken on. When you look prior to 2020, prior to this amazing boom cycle we’ve seen in demand for computer hardware, interest payments were consistently greater than operating income. I know that you have a logical reason for why this is and I’ll let you explain it to investors maybe why they shouldn’t be as concerned about that as I’ve maybe painted it out to be. But either way, it just doesn’t leave a lot of shareholder value when you have a lot of debt that’s higher in the value chain than yourself.
Sharma: Yeah. Emily, usually, I’m really skeptical when I see this. It’s like a pattern that you’ve seen before. Then we can jump into this now, because we will be able to explain something else about the company, in that for the longest time, this has been a growing organization that’s controlled by a private equity company called Eagle Capital. When you are controlled by private equity, typically, that’s different than when your backers are venture capitalists. A venture capitalist is a group of investors or a company funded by investors that is really looking to maximize what they can out of an eventual IPO. They’re pretty careful to build a really strong business model. A private equity firm is a little bit of a different animal. It’s the type of company that doesn’t mind carving up a company to extract value. They’re very value extractive. When you are being funded and managed through a board by private equity companies, they don’t mind if you take on a lot of high interest debt. This is something I’ve seen time and time again, the difference between the two animals, because private equity often sticks around after the IPO and they continue to get their rewards. They’ll sell little trenches of stock. They’ll get preferred dividends down the road. They’re in it for a really long time in some sense. I think that can lead to subpar returns. Actually, I do worry about it a bit because in investments I’ve looked at, the record is mixed.
I can think of companies where it just didn’t work well after the IPO. There wasn’t that true emphasis on growth. But then there are companies like BJ’s Wholesale, which was in a very similar position, in that they were controlled by private equity and they had a lot of debt on their books. They used some of the IPO proceeds to pay down some of that debt, and they’ve done pretty well. Of course, they’ve had a pandemic boost. I guess what you were referring to earlier, Emily, is that they did pay down some of their debt with their IPO proceeds, so the debt on the books is a little bit less now. That’s good. I will point out though, to your point, this debt is all high-interest debt. It’s not cheap. I like the company’s market position. I wish they’d been a little bit more careful. We can get into the weeds here. There are any number of ways to take on debt on your books without having to pay a high interest expense. We’ll leave it there. [laughs]
Flippen: Yes, definitely. It’s funny because before we started taping this episode, we were coming on Motley Fool Live, when another co-host was leaving, and they’re having a conversation about Yeti, which I probably picked up before we started to tape because I know we’ve talked about Yeti a lot before both on Motley Fool Live and on this Industry Focus podcast. But that was another business that was heavily in debt by a PE firm that had been milking the business using Yeti’s cash flow to pay themselves special dividends, and then spun it out in an IPO, using the proceeds from the IPO to pay down their debt. It was a little cycle that I didn’t like to see, but I was really wrong with my, I guess I should say tepidness that comes with heavily indebted businesses that are going to public markets because like Corsair, Yeti was a brand-based business and that brand carried a lot more weight than I initially gave it credit for. I can see a situation where Corsair has done a similar thing, and really grabbing a captivated audience of gamers and people who are looking to upgrade their systems by retaining their No. 1 position, by being Corsair. It, by proxy, makes whatever they do next more likely to be successful. I won’t say it will be successful, but having that loyal base of fans, I don’t want to devalue how important that is, because it does give them a lot of optionality with new products and new acquisitions that they get in the future because they’ve already gotten past step one, which is the brand awareness and the end-user.
Sharma: Yeah, absolutely. Well, let’s break down this revenue model so we can get a little bit of a clear picture on how they make their money. Emily, you’ve pointed out when we were prepping for the show that most of their sales are coming from gaming components and systems. This is led by the sales of memory cards, like think RAM. This makes up about 40% of the business. If you look at last year and their most recently reported year, 2019, memory made up 40% of revenue. I wanted to just add here that this is how the company started. This was the core business of the company in the 1990s. They still outsource various chips and slap their label on those chips. As far as RAM is concerned, they still retain their manufacturing facility. It’s based in Taiwan, so they can control production and they can fine-tune production with demand. To me, that’s a pretty solid core revenue stream to have and they’ve obviously built on top of that with all the other types I components we’ve been talking about. You have a point on their gross margin that you wanted to make.
Flippen: I’m just such a nit-picky person, aren’t I? I apologize. [laughs]
Sharma: You have to be.
Flippen: It’s my job. All these numbers are from the year-end 2019, and I recognize that these have, in some cases, changed not in a nominal manner in 2020, but I think it’s mostly fair to look at 2019 as a stable year given how weird 2020 was for production, for sales. Looking at 2019, as you mentioned, over 40% of sales came from what they called memory products, so things like RAM, another 27% came from the periphery. So keyboards, mice, computer cases, that sort of thing. The rest of it was made up by what they call other component products. Other things you would stick into your computer to make it run, so power adapters, for instance. If you look at the way their gross margin breaks down, the segment that is the lowest gross margin for them, again, at the end of 2019, is their memory products and it’s fine. But what I want to see is I want to see that focus on higher-value software and I want to see gross margins improving to the point where I think people are willing to pay more for the Corsair product. That would show a higher level of pricing power in their brand that I’m seeing right now in their gross margins. This is really nit-picky because like I said, this is a hardware business.
You can’t look at our hardware business and say, man, I wish you had 80% gross margins like DocuSign, for instance. That’s not going to happen. But I think it’s fair to say that you spent the last 20 years or really the last five to 10 years building up a strong brand, selling really valuable hardware components. Now, what can you do to make those customers sticky and what can you do to make those customers want to pay 20% or 30% more for Corsair over their competitors? Because over long terms, I think investors want to see those memory products jump up from 16% margins right now, which is where they are, to maybe 20% or 25% to prove that there’s value for them over their competitors.
Sharma: This is an excellent point, Emily. In fact, going back to the brand, if you think about how you improve that margin, it’s just that, it’s the brand power, it’s asking someone to pay more. So much as the business, although they do manufacture quite a bit of components, outside of the RAM, is slapping their name on things like chips. They outsource and then they brand that outsource component. I was looking over Logitech’s net sales by product category, and I realized that they have been in this business for a long time as well. Logitech has gross margins that today are around 42%, double the gross margins of this business, and double a well-known competitor, Razer, which I mentioned before, which also has gross margins in the 20%-22% range. But Logitech, I’m just going to read a couple of these categories; point devices, keyboards and combos, PC webcams, tablets, and other accessories, gaming, video collaboration, mobile speakers, audio and wearables, smart home, other.
They have such a powerful brand in the market, even though they’re not looked at as a really super high-quality brand in the gaming sector. If you just think about buying Logitech brands, if you need a new mouse, I have one, so we’re taping right now. You can’t see this if you’re listening, we’re on Live. I hope you can see that. But I bought this mouse a while ago. I needed a wireless mouse to replace mine and I bought Logitech because I know the brand and I know that it’s going to be good quality. Logitech has pricing power. That brand-name is worth whatever. I didn’t pay by just getting the cheapest thing off of Amazon. I actually went to an office store and bought this mouth because I use my mouse [laughs] every day. This is the next step for this company, is to capitalize on a pretty nice brand among enthusiasts, but be able to find some way to charge more for products. The other way is, I agree with you, is to have more of a software component. Unfortunately, they haven’t really focused as much on that. But this is something that I think the company can work on, even a few percentage points worth of margin will help going forward. Let’s say if they could get up from around 20%, 21%, up to the 25%-26% range, that would be a step forward in the next several years.
Flippen: One of the reasons why their margins may be less compelling than Logitech is just how much of their sales come through third-party platforms like Amazon. Over the last 12 months, Amazon represented 30% of revenue or just about 30% of revenue, and sales, the 10 largest customers with over 52% of sales over the same time period. There’s something to be said there for just reliance upon third-parties as opposed to getting a little bit more direct-to-consumer sales, which could be, even without a change in the product suite, a higher-margin sale for them. To your point, Asit, I’m looking down at my keyboard and my mouth right now, both of which are Logitech branded. I think it’s fair to say, casual gamers, I’m going to officially start calling myself that now, a casual gamer like myself.
Sharma: It’s a slippery slope, Emily.
Flippen: It is a slippery slope, isn’t it? [laughs] I don’t need Corsair’s keyboard or Corsair’s mouse to enjoy my experience. But for people who live more closely into that lifestyle, when they’re looking to upgrade to what they would be like a mechanical keyboard or a gaming keyboard, a gaming mouse, something that lights up, that you can then hook up to other Corsair products which are lights behind your computer integrated into your games. These are things that Corsair offers. That’s just truly an immersive experience that really only appeals to what is the highest value gamer in the ecosystem. I think there’s room for Logitech and Corsair to be successful, just because it does feel like they’re targeting different people. Logitech wants the assets and the emulates of the world when our mouse breaks to go down to Home Depot or to Amazon or to wherever third-party retailers we’re going to and pick up a Logitech platform or Logitech hardware. In Corsair’s case, I think it would make sense for them to more closely target higher-value gamers and potentially have them just go directly to Corsair’s owned e-commerce store next time they need to replace one of their items.
Sharma: Yeah. Certainly they can do that. I think they’re off to a good start. Even as we say, they are a couple of decades old. They certainly have this opportunity moving forward. Speaking of opportunity, a couple of points about the market opportunity here. Is this right, Emily? Gaming represents more than 10% of leisure time in the U.S.? That sounds awkward actually.
Flippen: That’s a number they threw out in their S-1, and it’s funny because that to me actually sounded a little bit low, although admittedly they’re saying that that doesn’t include streaming or people watching people play video games, which I feel like if you combine that with just game time itself, could probably be a much even bigger market opportunity than they’ve expressed. But yes, that’s what they say, at least.
Sharma: Well, this gets me excited about this company and the market in general. The global gaming PC and string market, over $36 billion in 2019. This market is driven by mainly a smaller subset of gamers. They spent most of their time on gaming setups. You point out, Emily, this means for Corsair that they are attracting and retaining that smaller subset of gamers who are going to pay up for the gear. Now, two points to make about this. I like that this market is so big and I like that it’s growing quickly. I dug around and if you average out different people’s opinions on how fast this market is growing, you land around 10%, so a compounded annual growth rate of 10% for this market. Why I love this is because in the consumer goods space, if you find a company that’s in a faster-growing market and it is still relatively young, you can pin that company’s growth to the market. In other words, if Corsair is going to just grow as fast as the market grows, it will be growing at a 10% compounded clip every year. Now, if it exceeds that, it can grow to 15%-20% case, and by and large, fast-moving markets, better companies will grow at or beyond that rate. There’s built in opportunity for the company to increase its revenue and its revenue expansion rate.
The second part of this that I really like is that, here we go back to brand. Maybe this does mean that there is a lot of potential as the market grows for Corsair to tap into select gamers. Now, this is anecdotal, I always try to […] [laughs] take it for what it’s worth. I called up my son this weekend in Germany. He’s in engineering school there. He’s studying mechanical engineering. He’s not really a gamer, he games some. I guess he’s a casual gamer like you, Emily. But he does build mechanical keyboards in his spare time. He’s been to this for years and he helps his friends build computers to spec who are gamers. Here’s what he told me about Corsair, his opinion. He said that Corsair is a type of brand that when you become serious about gaming, you’re going to step up to it. They’re really respected, a very solid brand. But he said that people who are really diving into gaming in a big way, they start to look beyond Corsair into higher-priced boutique brands, which I mentioned at the beginning of this podcast, it seems like there’s more of them popping up all the time.
He also told me that they’ve lost a little bit of their luster, just as the market has grown and more people have gotten into the gaming market and have been exposed to so many brands. If you have built your own keyboard, you know what I’m talking about. If you’ve ever tried to spec out parts for a keyboard, it’s not that you’re going to do this organic Google search and only come up with Corsair is offering you the components. You’ll see a lot of cool companies with some really attractive keys. I watched him do this when he visits at home and I want him to build me a keyboard at some point, because he can make some really whacked out keyboards, and I have this boring Logitech keyboard [laughs]. Here we go, brands. Yeah, I just want to throw this out for what it’s worth. This is one person’s opinion. But after having said all this about brands, what are your thoughts, Emily, about this company’s potential as consumers become more familiar with it and they have a potential to either stick with Corsair or move on to higher-priced, smaller boutique companies?
Flippen: It’s a good business, and I actually think that more businesses, especially boutique brands getting into the space says a lot about the market opportunity, and I almost feel like it’s this natural progression that happens when a brand reaches critical mass of acceptance, where the people who are loyalists for whatever aspect it is, whether it’d be keyboard, mice or even, say RAM. I’m not sure if there’s any RAM loyalists out there. But maybe there are. [laughs] They go to what’s niche, and Corsair is no longer niche. I think that’s a totally fair statement. But that’s a better thing for the business, is if you lose the people who are really deeply ingrained, but you get the larger mass of people who are just looking to upgrade their PCs, that to me, in my opinion, it’s probably the better market to be in for investors.
But I have to admit, I think I’m not super interested. Part of the reason why I’m not super interested is because I’m not sure how I believe in the upgrade cycle and what’s going to happen to the upgrade cycle for computers over the next, say, five, 10 years. Since I’m a long-term investor, I’m 26, the company that I buy today, I plan on holding for 20+ years. What makes me nervous about the idea of holding Corsair for the next decade or two decades is the emergence of more efficient machines and things like Cloud gaming. One of the highlights that Corsair’s management was sure to point out in their S-1 was how dependent they were on third-parties to improve their, say games, for instance, and games that are higher-quality games. Cyberpunk 2077, which came out not too long ago, had a lot of pushback, not just because it was poorly optimized. Don’t tweet at me, I know that the game had issues, but in part, because people’s computers or systems couldn’t handle it, and that’s actually what drives a lot of the sales of Corsair’s products, especially things like memory or power, cooling systems, is because these third-party items need people to upgrade their PCs to better play them.
With the emergence of Cloud gaming, which would allow people to stream games from somebody else’s server, somebody else’s computers to their own, wouldn’t require high-end products to run these third-party games or programs. I think that’s where the future is going. Now, of course, people who are playing games professionally are probably not going to stream them from somebody else’s server. But I think that the mass of people for whom Corsair is trying to get buy their products could eventually go the way of just not needing to upgrade their PCs anymore. Therefore, I don’t need to get a new SSD card or a new memory system or a new cooling system, because my current one is fine to run the new products as they come out. That might be a ways off, but I think that’s the thing that makes me the most nervous with this investment.
Sharma: I will talk about other risks that make me a little nervous. That is that the company is really not paying much attention to the mobile market. That’s by design. Just what you’re talking about Emily, the increase in sophistication of games makes it easy for Corsair to be a player in the console space with pcs, peripherals, etc. Because they built their whole business around this model, in one sense, they don’t need to look at the mobile market. There’s plenty of places we’ve been talking about other market options. There’s plenty of space for them to play in. But mobile gaming is growing at a really accelerated pace and it’s catching interest from a lot of younger enthusiasts. This is one of the things when you hear these buzzwords like Edge computing and 5G Ethernet around.
This is one of the spaces where you might see a tangible effect in just a few years. That is, with an increased amount of power in server networks and proximity to end devices to mobile phones and tablets, you reduce latency, and latency is just a pause in milliseconds between the time you send a request with the server on your device and the time you get that information back. As 5G also enables faster communication, the promises that you’ll be able to play really high-definition games right on your mobile device. I do understand that certain games need peripherals. They’re just not as realistic without something in your hands, I get that. But on the other hand, there’s this huge part of the market that’s exploding. Again, people even younger than yourself Emily, are natively coming up to play mobile games on their phones. This is a risk for me and they do address it in their S-1.
They talk about 2.4 billion mobile games just last year. But how focused they are on developing their gear and their response is we’re aware of this. But we’re still going to shrug our shoulders and stay focused on our markets. For me, maybe that’s a risk that really gives me some pause. I also try to invest for the very long-term. This is a company I would follow but because of these concerns I’m not ready to jump in just now. Maybe if they acquire another software type company or get some type of subscription service to your point running and build those margins and increase opportunities there, it might become a little more interesting to me. I’m not saying it’s bad company by any means. It has become profitable during COVID-19 and hopefully they will hold onto that boost. But any other risks that you see that might give you some pause on this one?
Flippen: I think it’s hilarious that you highlighted the mobile risk. I’m such a comargin. I didn’t even think about the mobile industry, despite my relatively young age. I grew up in the era of mobile phones. I have to use my phone. I used Fidelity as my brokerage and they only let you trade fractional shares over your mobile device. Any time I want to trade fractional shale, I always get really irritated because I have to get my phone, log into the app, make the purchase on the app. I had completely forgotten how big of a market mobile gaming is. I actually really like that you highlighted the risks that they have essentially right now, purely PC gaming for the most part and increasingly, streaming, which is a good market to be in, but not growing as quickly as mobile devices. I actually like that risk. I still have my issue about the future of say, Cloud gaming, things like Google [Alphabet] Stadia, Amazon Luna, or Microsoft xCloud. All of those things make me a little bit nervous about the need for peripherals and need for upgrade systems but I like that. I’d want to see them doing more in the mobile market.
Sharma: I should point out here that vis-a-vis Fidelity, I just decided to only use my phone when I can. Just because it was irritating when I wanted to buy fractional shares to log in, just what you’re saying. But I find maybe I’m like gradually gravitating to that versus the web interface. But listeners, it’s a really great platform if you want to buy fractional shares, Fidelity does a great job of that. You can plug in $1 and buy $1 of a company that you like. It’s probably worth the trouble.
Flippen: You could buy $1 or $10 or $100 of Corsair for instance.
Sharma: Exactly. Now, Emily, before we get out of here for today, we should mention something that might be confusing to shareholders or investors. If you’re looking for their S-1 there are prospectus for their initial public offerings. If you’re looking at the most recent document, they’re actually doing a secondary offering that it’s pricing today as we record. Just really briefly, we mentioned Eagle Tree Capital, which is the long time private equity investor in Corsair. They’re cashing out a portion of their shares today, along with some smaller shares from key executives in the company. They’re going to offer 7.5 million shares to the public today, or they are offering those and their underwriters have an option to purchase an additional 1.125 million shares. Now, the company is not going to get any of these proceeds. This is just something I mentioned earlier. Private equity firms will keep doing this. They’ll decide to sell a chunk of shares as they go along. Eagle Tree Capital is still going to own about 68.5% of the company after today’s sales are complete. This private equity firm still controls Corsair and Corsair’s destiny. I don’t know if you had any thoughts on that as we like it.
Flippen: I actually have two additional thoughts. Thank you for highlighting the secondary offering, I’d completely forgotten about it and that could definitely be confusing for investors. Two additional things, one is you gave me the great opportunity and which I totally overlooked to highlight one of the additional risks that I had noted down but forgotten about, which is I feel the need to disclaim it each time we cover a company that mentions this. But there were material weaknesses when they went public. These are material weaknesses related to insufficient trained resources, I guess, to detect issues regarding their financial reporting, failure to identify key risks. A lot of financial reporting issues that starting in 2021 when there cease to be an emerging growth company, they’re going to have to have independent audits attached to their internal controls. With that coming inevitably this next year, as well as the issues that were highlighted regarding the material weaknesses, it always makes me a little bit nervous when a company can’t accurately report their own financial performance, especially a company this old. That’s a little bit of a red flag for me. Then lastly, one other thing I want to mention before you get off here is that, as we’re taping, I’m finding out from our Live audience that we are out of date in our Fidelity knowledge, apparently Fidelity lets you trade fractional shares on the web interface now.
Sharma: That is good news. Again, those of you who are listening can see this. We’re taping Live, but my cracked old Motorola Android phone, it’s such a hassle. Thank you everyone, that’s so good to know, I’ll go to the web next time.
Flippen: I was literally buying shares yesterday and I wanted to buy equal proportions. I went on to the app then did it all on the app and I was very frustrated. Now, I’m kicking myself knowing that I could have just done it on the web.
Sharma: Well, we have the rest of 2021 to now enjoy buying fractional shares right off the web interface. Really quick point, Emily, I love that you pointed this out on internal controls because it seems something that’s like audit ease, just jargon. But it’s extremely important this whole idea of internal controls because if those aren’t sufficiently strong then there are all types of things that can happen. A company may not be able to monitor its systems to know how much inventory it has. There’s so many things that can go wrong and I also get a cold fuzzy, it’s a warm fuzzy and I’m an auditor by training. A warm fuzzy is when everything comes together, the numbers and everything you observe, and you want to be able to give a clean opinion. But a cold fuzzy is when things don’t look right and when you start with weaknesses and internal controls, that’s never a good sign. Hopefully they cleaned that up and let’s see what kind of ad station they get, how the opinion looks next time round. This will be important for shareholders. Always follow these quarterly and annual reports, they’re worth reading. They tell you so much.
Flippen: I love cold fuzzy. I’m going to start using that from now on.
Sharma: Feel free.
Flippen: Asit, thanks as always for joining.
Sharma: Thanks a lot, Emily, I’m going to try to restrain myself from going out and buying a high-end component after this. But I definitely know that we have talked about wanting to look at some of the gear I’m using.
Flippen: Actually, it’s funny, in the market for a new keyboard a broke the little steels, I guess that my keyboard typically sits on. I may get myself a Corsair keyboard for research, say stock research.
Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say ‘Hi,’ you can always shoot us an email at firstname.lastname@example.org or tweet us @MFindustryfocus. As always, people on the program may own companies discussed in the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I’m Emily Flippen. Thanks for listening and Fool on!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/02/02/corsair-gaming-what-investors-need-to-know/