Corsair Gaming (NASDAQ:CRSR) certainly picked a good year to have an initial public offering. Business was booming during the pandemic, with revenue up 55% in 2020. The stock initially tripled from its September IPO price but is currently 30% off its 52-week high of $51.37.

Investors are skeptical about Corsair's ability to maintain the pandemic-driven sales momentum, but Corsair is an interesting case in that it was already enjoying growth before the pandemic, and management is guiding for more growth in 2021 after a strong first-quarter earnings report.

The stock appears priced for further appreciation if Corsair delivers on management's guidance, trading at a forward price-to-earnings (P/E) ratio of 19.7. Let's look at three catalysts that could send the stock higher.

Gamers wearing headsets and playing video games on PCs.

Image source: Getty Images.

1. New products fueling growth

During the first quarter, Corsair Gaming reported a massive revenue jump of 132% for its gamer and creator peripherals segment. This segment includes sales of items that game streamers need to put together a professional-looking broadcast, like green screens and quality microphones. It also includes gaming essentials like headsets and controllers.

Corsair also reported a 52% increase in revenue for gaming components and systems, such as memory modules and power supplies, indicating that gamers are continuing to spend on computer parts to upgrade their gaming PCs.

Most telling about Corsair's momentum was that revenue from gamer and creator peripherals nearly tripled compared to Q1 2019 levels. Corsair ramped up its new release schedule to almost two new products per week in the recent quarter, which is meeting high demand. Research and development (R&D) expenses increased 31% year over year in Q1, and the company will maintain a higher rate of R&D spending through the rest of the year to prepare for new product launches.

"We will continue to invest at a similar pace in product marketing, and you should expect us to continue to launch new high-performance products with the blistering pace and use these products to gain market share," said CEO Andy Paul.

2. Margin improvement

A key factor to remember is that sales of gamer and creator peripherals generate a higher gross margin than sales of system components. In Q1, Corsair saw its gross margin jump 4.8 percentage points over Q1 2020. Gamer and creator peripherals posted a 211% increase in gross profit, while gaming components reported a 62% increase.

This translated to a big improvement in net profit in the first quarter. Earnings per share came in at $0.47, up from $0.01 in the year-ago quarter. Most importantly, Corsair generated $181 million in free cash flow over the last four quarters.

The product mix shift toward gaming peripherals is a great opportunity to expand margins. "This is a great overall story and formula for continued overall margin expansion, as our fastest-growing and highest-margin segment also sits in our largest market," Paul said.

Corsair won't report strong margin performance like this every quarter, as management cautioned. But as Paul explained, "[I]t certainly underscores our strong conviction that margins will increase over time, as we continue to bring out high-feature products and become more dominant in the market."

3. Debt reduction

Management is using its improving profitability to pay down its debt. At the end of Q1, the company held $121.6 million in cash, but that was more than offset by $294.5 million in debt. However, debt declined by $27 million from the previous quarter, and management expects to pay down another $72 million in the near term.

Investors typically reward companies that have lower debt levels with higher valuations than companies that maintain debt-heavy balance sheets. In February, Standard and Poor's raised Corsair's corporate rating from B+ to BB-. Further debt paydown will lower the company's financial risk, which may earn the stock a higher valuation.

Investors are undervaluing Corsair's future

The growing popularity of live game streaming and esports is driving more customers toward Corsair's gaming products. These trends explain why management expects revenue to grow between 11% and 23% in 2021.

The stock's forward P/E of 19.7 seems too low given the company's outlook, or compared to its larger peer Logitech International, which trades at 29 times expected earnings:

A chart of Corsair's and Logitech's P/E ratios, showing upward trends for both.

CRSR PE Ratio (Forward) data by YCharts.

The plan to pay down debt, while reinvesting in new products, should eventually cause investors to take a second look at Corsair's stock -- and send it toward a higher P/E multiple.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.