Watch for Corsair Gaming’s Free Cash Flow Explosion This Year
Corsair game (NASDAQ:CRSR) is a $ 2.7 billion market-capitalization game console company whose revenues and profits have been in tears. This is great news for CRSR equity investors.
Expect this company’s earnings and, more importantly, its Free Cash Flow (FCF) to explode this year and next as its gaming popularity continues to grow. This means that the stock of CRSR is also likely to increase by at least 43% over the next year.
Corsair plans to release second quarter revenue and results for the quarter ended in June on August 3. This means that investors will see how fast the company is growing and more specifically how high its FCF margins are.
FCF and valuation
Keep in mind that the first and second quarters are usually the slowest periods of this business’s annual growth.
At page 9 of the 10-K annual report of the gaming company filing with the SEC, he provided several reasons:
“Our net sales were generally lower in the first and second calendar quarters due to lower consumer demand after the fourth quarter holiday season and due to lower sales that generally occur in anticipation. the introduction of new or improved processors and graphics processors, which typically occur in the second calendar quarter and tend to drive sales in the following two quarters.
Regardless, analysts still expect second-quarter revenue to be between $ 467 million and $ 475 million, according to surveys from both. Yahoo! Finance and In search of Alpha. Compare that figure to last year, when the games company generated $ 380.4 million in sales of game consoles and peripherals. So this means that sales will be 22.9% to 25% higher in the comparable period.
So far, the company has yet to release its second quarter 2020 cash flow statements. However, in the first quarter, the company generated $ 27.768 million in cash flow from operations (CFFO). . After deducting $ 2 million in capital expenditures, its Net Free Cash Flow (FCF) was $ 25.7 million on revenue of $ 529.414 million. This means that his FCF margin was 4.85%. Additionally, in 2020, Corsair Gaming made $ 160 million from FCF on revenue of $ 1.7 billion, for a 9.39% FCF margin.
Corsair’s second-quarter FCF margin might not be as high as its overall 2021 FCF margin. But using a 10-12% FCF margin for 2021, that company’s FCF could explode to $ 248.4 million. this year and $ 258 million next year. This is based on projections of $ 2.07 billion in sales this year and $ 2.15 billion for 2022.
What Corsair Gaming Might Be Worth
In the last 12 months (TTM) through March 2021, Corsair Gaming achieved free cash flow of $ 185.5 million, based on figures from TTM Cash Flow Data for CRSR Inventory. Now, given that CRSR stock has a market value of $ 2.76 billion, that means it has a yield of 6.7% FCF (i.e. $ 186 million / 2, $ 76 billion).
However, if Corsair’s FCF hits $ 248 million this year as I think it is, then its FCF performance will likely improve as well, say to 6%. Therefore, if we divide $ 248.4 million in FCF for 2021 by 6%, the resulting target market cap is $ 4.140 billion. This represents a potential gain of 50% over the current market cap of $ 2.76 billion.
In turn, this means that the CRSR stock could be worth 50% more or $ 44.85 per share (i.e. 1.5 x $ 29.90). Keep in mind that this is a pretty aggressive goal, based on a 20% gain in your FCF margin from 10% to 12% this year.
But just to be on the safe side, let’s say it maintains a 10% FCF margin on 2022 sales of $ 2.15 billion. This involves $ 215 million in FCF and using a 6% FCF margin, the target market cap will be $ 3.583 billion. That’s nearly 30% higher than its current market cap of $ 2.76 billion and involves a price of $ 38.78 per share.
What to do with CRSR stock
So we now have a range of values for the CRSR share of between $ 39 and $ 45 per share, or $ 42 on average, depending on the expectations of the company’s FCF generation. We don’t know when the stock will hit this price, but we can reasonably say that over the next year to a year and a half, CRSR stock will generate a 40% ROI.
Let’s say you have to wait until the end of 2022 for the CRST stock to reach $ 42 based on its TTM FCF yield of 6.0% and FCF margin of 20%. This implies an average annual compound return of 18.3% per annum. In the worst case, this is a very good return on investment for most investors.
As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.