Quicky on Cherry (C3RY GR)

E-gaming, home office and digitalization might all be good trends for Cherry.

This is not investment advice. Please read the disclaimer.
I might currently or at a later point in time own shares (economic interest) in mentioned or related companies.

On April 4th, I restumbled over it in this tweet of a target price reduction.

Originally, I got to know about Cherry AG in Dec 2021 (feels already like a long time ago!) from the 32. MKK – Cherry AG – YouTube. The bbg Ticker is C3RY GR and already reminds me of a friend from a long time ago who was into gaming. It seems using digits to replace letters is still a thing.

Originally a US company, the founder rebased to Germany where his son tragically dies with a helicopter accident. ZF bought it and, a then much smaller Cherry was carved out and listed in 2021.

Cherry produces computer peripherals and components. A special focus is the e-sports market. Cherry might benefit from following trends:

  • E-sports/gaming
  • Homeoffice (remote work)
  • German healthcare digitalization

Two operating segments build the basis for reporting and are structured as below: 

  • Gaming segment includes
    • mechanical switches for gaming keyboards, and
    • periphery equipment for gaming PCs.
  • Professionell segment includes
    • computer peripherals for office and industrial usecases, and
    • healthcare and security peripherals. Production according to specifications and design and production via own production capacity in China or by third parties.

High-end mechanical switches for gaming keyboards are used by professionell gamers mostly living in Asia and competing at the edge. Thus, components/equipment at high price points is used if it provides an performance advantage.

  • Mechanical switches are preferred over rubberdome-based keyboards for superior features.
  • Ultra low profile (ULP) switches is a new well received innovation for gamers (notebooks). Dell exclusivity ended in Dec’21 and other four customers shall be onboarded. Alienware (Dell) and another customer was onboarded by now. Cherry invested a lot of money and R&D resources in the ULP. ULP price point is 2x standard switches.
  • The Cherry brand is well known in gamer niches enabling higher price points. Cherry states to benefit from a pull-factor within its B2B sales approach, since its customers want to advertise to their end-customers the ‘Cherry inside‘ slogan, comparable to Intel’s ‘Intel inside‘.
  • All switches are produced in Germany, distribution from Auerbach and Hong Kong (close to big asian markets).

Gaming periphals are only sold in Asia (5:12). Its customers of switches in the US and Europe would not accept to compete against Cherry’s products. In Asia it is another story, since Cherry way always #1 in Asia gaming market.

  • China gaming market faces political headwinds.
  • Always #1 regarding keyboard sales on singles day (11/11) in China.
  • Its own Cherry products for gaming (i.e., keyboards, mouses, headsets) are produced in Zhuhai (China) using a high degree of automation.

Industrial and office segment is 10x the gaming market and served as well. (5:36)

mostly used for gaming, but also in the office and industrial sectors.

  • When my girlfrined saw me watching the 2021 webcast, she told me her keyboard is from Cherry. Blind me, was not aware of it, despite using it yesterday during a good-investing community video call. It is a nice flat keyboard, designed in Germany, made in China and not exactly new since it shows ‘ZF Friedrichshafen AG’ from pre-IPO times.

Healthcare and security peripherals.

  • E-health terminal (ST-1506) competes against merely one competitor with a very ‘old’ product.
  • This segment could gain traction in a few years with additional software services.
  • Active Key acquisition in May 2021 enabled Cherry to strengthen its healthcare product portfolio, incl. washable keyboards, secure keyboards (impossible to copy or ‘listen to‘ keystrokes?)

Young IPO. Cherry’s IPO’ed not even a year ago on on June 29th, 2021. At a price of 32 Euro, 11.3mio shares were offered. September 14, an additional offering was announced, for 3.03mio shares. The stock traded at €33, more than double its current price of €7 €15. (great to look at a company during falling prices)

  •  Obviously, analyst target prices are well above actual prices since IPO

Management strengthened with new COO. According to director’s dealings shall

  • JOBECO Management GmbH (Joachim Coers, board) bought 264k shares @ €37 for 9.8m
  • RMU CAPITAL GmbH (Rolf Unterberger, CEO) bought stocks for €12.4m (within employee program)
  • Wagner Beteiligungs GmbH (Bernd Wagner, CFO & COO) bought shares for €11.9m (within employee program)
  • Marcel Stolk (board) bought 71.8k shares for €2.3m (within employee program)
  • Steven M. Greenberg (board) bought 12.8k shares for €0.4m (within employee program)
  • (I asked IR if management and board holds c. 5% in total (22:52) or 5% of free float, they only refered to above DDs.

Balance sheet seems strong on the basis of high equity of 293m for an equity ratio of 71% but almost half of total assets (€410m) are intangibles (190m).

  • Cash and equivalenty of EUR 109m as of Dec 2021 apparently result from the additional share sale.
  • Financial debt and leasing liabilities of € 65m in total (still good for €40m net cash).
  • Note 6.2 offers details for intangibles:
    • Customer relationships: 21m
    • Brand: 50m
    • Company value: 108m (goodwill)
    • Capitalized R&D costs: 14m

2022 guidance is for revenue of € 170-190m (2021: 168.5m, incl 3.3m Active Key) with an adjusted Ebitda margin of 23-26%, due to macro factors (corona, Russia/Ukraine, supply issues). To improve delivery capacity, the company built up inventories (€44m after 27m). After 2022, managemnet expects double digit revenue growth and improving adj. Ebitda-margins.

After 2022 management expects double digit growth and higher (adj) Ebitda margins. No big adjustments expected.

Current consensus is for net income of 16m in 2022 and 21.7m in 2023.

  • Corsair with disappointing prelim. Q1 sales.

Q1 2022 results were reported May 11th. Cherry veröffentlicht Ergebnisse für das erste Quartal und bestätigt Prognose für das Geschäftsjahr 2022 – Cherry AG

Capitalisation. Cherry has a market cap of € 182m (at €7.25 per share) for an implied P/E of around 10x.

2 thoughts on “Quicky on Cherry (C3RY GR)

  1. Thanks for the post.
    Here a few of my impressions after watching the latest earnings call: they don’t have pricing power, but can raise prices carefully. Inventory levels at resellers are probably high. They are not able to predict the very near future and react to new situations on a daily basis. However, they stick to their guidance (analysts are not convinced). The gaming market is driven by trends and every 18 month the equipment is replaced. The latest trend to smaller keyboards hurts volume.
    In my opinion the healthcare market is more interesting because I suppose it is steadier and margins are also good there. Also washable keyboard would be great for offices with a shared desktop approach. However, I am not optimistic that the management sees such opportunities.
    Anyway at current prices the stock becomes attractive, but the chart looks really bad and an anticipated disappointing Q2/22 might push prices even lower. So for me it is a watch candidate.

    Liked by 1 person

  2. Hi. Thx for your comment.
    I also think it is interesting as a watch, with such a negative price trend, which imo as well might well continue with lower revenue in next quarters since after 2yrs of pandemic each and everyone should have their gaming equipment and home office keyboards.
    Not yet sure what to make of management / big investors.

    Like

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