Corsair Crushes Sales Expectations, but Investors Still Hate Growth Stocks

Corsair Gaming (CRSR -1.47%) reported first-quarter earnings yesterday, delivering a significant top-line beat. However, the stock still sold off by as much as 6% before closing the day down by 3%. In no uncertain terms, the results utterly crushed sales expectations, and management offered an optimistic forecast for the rest of 2021.

Gaming and esports continue to be unstoppable megatrends, but the broader context for the dip is that growth stocks in the tech sector have fallen out of investor favor in recent months. Even a stellar release wasn't enough to improve investor sentiment, much like last quarter.

Image source: Corsair.

Obliterating revenue expectations

Revenue in the first quarter soared by 72% to $529.4 million, decimating the consensus estimate of $449.7 million. Importantly, growth continues to accelerate in Corsair's Gamer and Creator Peripherals segment, which is far more profitable than the more mature Gaming Components and Systems business. The latter segment sells fairly commoditized components like computer memory, power supplies, and PC tower cases, while the real growth and profit driver is catering to livestreaming with products like control panels, capture cards, green screens, and other creative accessories.

The complementary dynamic between those two businesses helps explain how gross profit more than doubled to $160.3 million, with gross margin expanding by 480 basis points (4.8 percentage points) to 30.3%.

Data source: SEC filings. Figures may not sum because of rounding.

Adjusted operating income increased 221% to $80.4 million, while adjusted net income skyrocketed 420% to $58.2 million, or $0.13 per share. While that admittedly missed Wall Street's forecast of $0.33 per share in adjusted profits, these are hardly figures to be disappointed with for a company trading at under 2 times sales.

Top-line expansion and gross profitability are far more important for a small cap growth stock like Corsair, since operating expenses tend to be investments in future upside.

"End demand remained strong for our products and our new products such as the K65 mini RGB keyboard and Elgato's new accessories debuted well," CEO Andy Paul said in a statement. "We introduced 29 new products in the first quarter and we expect this blistering pace of new product introduction to continue throughout the year with several brand new products still to come."

Bolstering the balance sheet

When Corsair went public less than a year ago, it used a majority of its IPO proceeds to pay down debt while being clear about its intentions to keep reducing debt to strengthen its balance sheet. The company made good on that commitment again this quarter, reducing debt by $28 million and bringing gross debt down to $299 million. Operating cash flow is growing so rapidly -- increasing nearly 14-fold to $27.8 million -- that Corsair can aggressively pay down debt while still funding strategic initiatives.

Image source: Corsair.

Extinguishing that debt is helping cut interest expense. Total interest expense in the first quarter fell by 47% to $4.9 million, and the $28 million that was paid off will translate into another $1 million in interest savings in 2021. Thanks to the progress in this department, credit rating agency S&P upgraded Corsair's corporate debt rating to BB- in February.

Lingering supply concerns

If you haven't heard by now, there is a global shortage of semiconductors that is impacting a wide range of industries. Chips are in everything these days, and Corsair had previously acknowledged that supply constraints held back sales in the fourth quarter. Supply chain challenges are persisting, but Corsair is making progress and fundamentally sees the issues as short term in nature.

"Now for us, specifically, the good news is we could have shipped even more," Paul conceded on the conference call with analysts. "So Q1 results as good as they are, could have been higher if we would have more supply."

Supply constraints are undeniably a problem, but having overwhelming demand is a pretty good problem for any company to have. The chief executive said that Corsair has secured enough supply to support its full-year guidance -- which it raised and we'll discuss in a moment. The company's procurement teams are working diligently to get even more supply (of higher margin products), suggesting that there is even more upside to Corsair's outlook as long as demand trends hold.

A rosy outlook

Speaking of guidance, Corsair boosted its outlook for the year on all fronts:

Data source: SEC filings.

Corsair has only been public for a short time, and in that limited history it has tended to take a conservative approach to offering forecasts. It would not be surprising for Corsair to continue outperforming its internal expectations and raising its official guidance.