We recently met with mgmt. and we are positive on Razer to deliver operational breakeven in 2H19E (excluding smartphone) and continue growth trajectory in FY20E, on back of strengthened leadership in mobile gaming, global e-sports boom and momentum of high-margin service business.
- On track to achieve adj. EBITDA breakeven in 2H19E. Mgmt. expects to post mid-teen revenue growth in FY19E, driven by 1) peripherals with high-single-digit growth as a result of strong 4Q19 festival sales amid macro weakness, 2) systems with ~35% YoY growth thanks to new debuts and share gain in Europe/China, 3) services with ~40% YoY growth on accelerating monetization. We are positive to see adj. EBITDA (excl. smartphone) to break even in 2H19E, thanks to solid revenue growth and improving operating leverage.
- FY20E: strong cloud gaming and product launch to boost growth. Despite weakness in peripheral in 2H19E, mgmt believes this segment will recover to 15% YoY growth on back of product debuts (e.g. Junglecat mobile controller, Hammerhead True Wireless earbuds) and stronger partnership with Tencent/Microsoft xCloud in cloud gaming market in next few years. Meanwhile, mgmt. expects systems and service biz to maintain high growth of 30%+ YoY in FY20E, resulting in overall revenue growth of 20%+ YoY in FY20E.
- Razer extending Fintech to digital banking. In additional to its O2O digital payment network, Razer Pay, Razer Fintech planned to roll out Razer Youth Bank, a digital full bank, through partnership with several renowned strategic investors (e.g. FWD, Sheng Siong) in Singapore. Mgmt. expects the digital bank license to be awarded in mid-2020. Leveraging Razer’s strong presence and branding in the youth and millennials, we are positive on Razer’s expansion into digital banking market in the long run.
- Expecting earnings inflection point in 2020 and onwards. We expect increasing visibility for profitability turnaround in FY20E thanks to rapid expansion and operating leverage. The stock now trades at 1.8x/1.5x FY19/20E P/S, compared to Logitech 3.0x/2.8x FY19/20E P/S. Upcoming catalysts include new launches of higher-margin and continuous share gain at the expense of Logitech.
