Corsair Gaming (CRSR -2.94%) delivered its best second quarter in history. Revenue advanced 24% year over year, reaching $473 million. However, the stock fell sharply after the earnings news, which can be blamed on a slight miss in non-GAAP (adjusted) earnings per share that came in below the consensus analyst estimate. 

While Corsair is dealing with higher logistics costs right now, which contributed to the profit shortfall, there was plenty to like from the Q2 earnings report. The stock has already started to recover some of its losses after the report, but there are three reasons the shares represent great value right now.

A gamer wearing a headset while playing on a PC.

Image source: Getty Images.

1. Strong revenue growth

Corsair Gaming is seeing extremely strong demand that the market is not giving it credit for. Revenue accelerated last year from 17% growth in 2019 to 55% in 2020. Yet the company still posted an impressive 24% year-over-year growth rate in the second quarter, which is against a very difficult year-ago comparable when revenue spiked to a 58% growth rate. 

During the earnings call, CEO Andy Paul offered a simple explanation for these strong demand trends. "So, what we believe is happening is that after people learn to play PC games for a while and get good at them, they start to want better specialized gaming gear," he said. 

This suggests that even as the company welcomes new customers to its products, older customers are upgrading, fueling the company's momentum.

Most importantly, Paul said this growth can go on for a while. He mentioned that only 20% of gamers playing games in the U.S. have bought a headset in the last three years: "And because the market is still at an early stage and the penetration is so low, that's why we are seeing such high growth rates in gaming hardware due to the low base." 

2. Margin expansion

Another important story developing with Corsair Gaming is improvement in gross profit margin, which the market also doesn't seem to appreciate yet. Corsair's earnings miss overshadows the tremendous opportunity to squeeze more gross profit out of revenue that the company can reinvest in new products.

"We continue to see a mix shift as gamer and creator peripherals contributed 41.9% of total gross profit in Q2 2021 as compared to 36.9% in Q2 2020," Chief Financial Officer Michael Potter said.

Potter suggested the margin gains should continue: "This remains 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."

A bar chart showing Corsair's gross profit up 24% year over year in the second quarter.

Image source: Corsair Gaming Q2 2021 earnings presentation.

3. More demand waiting in the wings

Semiconductor shortages for high-end central processing units (CPUs) and graphics cards have meant that many gamers haven't been able to buy the components they need to upgrade their gaming PCs.

Advanced Micro Devices (AMD -0.17%) is a key supplier of high-end chips for gaming PCs. During the pandemic, AMD prioritized replenishing supply for PC manufacturers but has just started to focus on major retailers, which should help more gamers get their hands on new chips that could also carry over to sales of Corsair's memory components, power supplies, and cases that gamers need to build and upgrade.

The gaming components and systems segment posted growth of 17% year over year in Q2, but Paul suggested it could have been higher if not for the supply issues.

"And so we actually think we've got a huge amount of people waiting in the wings to build, as these cards start to become available," Paul said during the call. 

Cheap growth stocks are rare

Management's guidance calls for full-year revenue growth between 11.6% to 23.4% over 2020. After the recent dip, the stock now trades at a low valuation of 15 times free cash flow. That is a steal for a company serving secular tailwinds around gaming, esports, and livestreaming.