Callaway Golf (NYSE: ELY) and Corsair Gaming (NASDAQ: CRSR) are two well run companies that have seen strong growth over the past 12 months. While both companies have unique characteristics and some competitive advantages, their reviews are still not cheap enough to be called “screaming buys”.
However, if their management teams continue to implement their current strategies, each could prove to be a great investment in the long run.
It has been approximately five months since Callaway completed its full acquisition of Topgolf shares. Following the purchase, Callaway owns a variety of businesses including several apparel retailers, golf equipment manufacturers, and a sports entertainment and technology company.
While the company’s golf equipment segment has seen strong growth over the past year, it is the top golf business that should excite investors. Compared to golf played on a traditional course, Topgolf offers a more social and family-friendly experience. With independent lounge areas on several levels, customers get a restaurant atmosphere paired with the fun of a driving range.
It’s a unique experience that can serve as a great introduction to the game. In fact, according to a survey by the National Golf Foundation, “75% of non-golfers who went to top golf said they are now interested in playing on a course.” With this in mind, Topgolf’s pro shops should be a valuable sales channel for Callaway’s equipment and apparel brands.
But not only the buyer benefits from the deal. Topgolf will now be able to access some of the roughly $ 400 million in cash and equivalents on Callaway’s balance sheet to help accelerate the venue’s expansion. Though the 2020 pandemic was challenging Topgolf, Callaway CEO Chip Brewer said on the May first quarter conference call that management expects the Topgolf unit to increase its revenue of $ 1.1 billion this year. US dollar in 2019.
Callaway currently has a market capitalization of $ 5.9 billion, which equates to a valuation of approximately 22 times the combined Adjusted EBITDA of Callaway and Topgolf in 2019 (or 16 times their combined EBITDA estimate for 2022). That might not seem cheap at first, but if the company can meet management’s stated goal of $ 1 billion in adjusted EBITDA this decade, it will look like a great price in hindsight.
Corsair Gaming is a premium brand in the esports equipment and accessories market. It has a variety of items ranging from high-performance keyboards to pre-built gaming PCs valued at $ 5,000.
The company currently has # 1 market share in most of its product lines, and as the brand is known for its world-class engineering and product quality, customers are willing to pay more for their equipment. According to the company’s IPO prospectus, its computer cases, cooling solutions, and power supplies are all sold at a premium of 30% or more compared to competing products.
The pandemic also contributed to sales growth. As people spend much more free time at home, the demand for video game components accelerated. As a result, Corsair posted revenue of more than $ 1.9 billion in the past 12 months and revenue growth of 72% in the most recent quarter. Those increases in revenue also contributed to a strong increase in profits as the company’s operating margin rose from 4.3% in 2020 to 12.7% in 2021 in the first quarter.
Even so, Corsair stock only trades at 13 times operating profit. This is most likely due to investor belief that financial performance in 2020 was anomalous and is unlikely to repeat itself. So far, this view seems to be justified.
According to gaming industry experts, spending on gaming accessories decreased year over year in June. While it is still possible for Corsair to deliver strong financial results in the second quarter, it is anticipated that there will be a significant slowdown in sales in the near future (management anticipates revenue growth of only 17% for full year 2021 ). .
But even with that short-term chunkiness in mind, long-term trends still favor Corsair. Thanks in part to content sharing platforms like YouTube and Twitch, competitive games have become more lucrative. This has resulted in rapid growth in the esports market over the past decade, and this trend is expected to continue. The growing number of gamers need the right gear to optimize their performance and Corsair will make it available.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.