Our pick for the coming earnings week (4.5.- 8.5.) is Turtle Beach Corporation (HEAR). Turtle Beach is a small-cap stock that sells high-end headphones for gaming consoles like Playstation and Xbox. In 2019 they bought a company called ROCCAT, which is a mouse and keyboard manufacturer. With that, they expanded their product offering to not only headphones. In this COVID19 situation, headphones are also being bought by people who are learning or working remotely.
The company trades at a 138 million market cap with 2019 revenue of 234 million and a net profit of 17.9 million. The company got a big bump in revenues and stock price in the year 2018 after the popular game Fortnite started to gain traction, and with it, the demand for Turtle gamer headsets.
Although the stock went from $5 to $10 in the March recovery, we still believe it could be an interesting buy before earnings, which is on May 7. We believe their earnings will beat expectations. The main reason for this thesis is the fact that the demand for the company’s headsets (both Xbox and PS4) is exploding according to google trends search data
They are even higher than the demand for their products is in their main December season. The company makes 45% of its revenue from September to December. With this ramp-up in demand, we think the company could have a big revenue surprise and good guidance going forward.
We also like the fact that the company stacked up inventory before the COVID19 outbreak because they were worried about the China-US trade war and the disruptions to the supply chain. Despite this bump in inventory, we can see some e-commerce sites are sold out on their headsets or in limited supply. We also like the trend of increased demand lasting in April, so it is not just a March phenomenon. Shift to more online orders, because of COVID19 store closers could also benefit the gross margin of the company.
Besides the short term COVID19 opportunity, we like the company going forward for the year 2020 as well. The main reasons are valuation and the console upgrade cycle.
From a valuation perspective, this stock has not been a favorite of many as comparing the P/E ratio with their competitor Logitech the difference is obvious.
Turtle Beach Corporation P/E ratio of 9.4 is nowhere near the 28.48 P/E of Logitech. While some lower P/E is justified due to the higher risk associated to HEAR for being a small-cap company, we believe the ratio should be closer.
An important factor is also the Playstation and Xbox upgrade cycle. Both Playstation and Xbox are planning to roll out their new products in November 2020. The console rollout presents a great year financially for headset manufacturers like HEAR, as a lot of customers that buy new consoles look for headsets as well. We believe going into the autumn of 2020 HEAR could get a lot more eyes for investors and analysts looking to profit from the console upgrade cycle. This could benefit the stock price and result in a P/E multiple expansion.
Disclosure: The author of this post is long HEAR. I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This is not financial advice. Please read the Disclaimer.
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