The San Diego-based maker of gaming headsets is riding on the growing popularity of this activity. No longer is e-gaming seen as a peripheral hobby, it is now accepted as a mainstream sport.
SINGAPORE (Jan 23): Nasdaq-listed Turtle Beach Corp (TB) is a worldwide gaming accessory company and solutions provider specializing in headset and audio peripherals. The “addressable” market size for gaming headsets is US$2.7 billion ($3.6 billion) according to market intelligence reports. TB has a 46% market share, making it the market leader. TB’s headset and gaming accessories portfolio addresses every level of gamer, from entry-level gamers to professional e-sports gamers, with a wide range of prices. With the recent acquisition of ROCCAT in May 2019, TB’s portfolio has expanded from the traditional gaming headsets niche for multiple platforms to gaming keyboards, mice and other accessories focusing on the PC peripherals market. The acquisition will help to diversify earnings stream and lower the company’s risk profile.
Revenue and earnings were significantly lower y-o-y in 3QFY2019 ended Sept 30, 2019, due to expenses involved in the ROCCAT acquisition. Also, in 3QFY2018, TB’s revenue had a lift from Battle Royale which led to record new gaming headset users. TB’s five-year revenue and income CAGR are 5.6% and 11.1% respectively. Both operating cash flow (OCF) and free cash flow (FCF) turned positive in FY2018, indicating the company’s fundamentals are improving. Despite this, share price CAGR in FY2018 was –1.4%, indicating that TB is under-owned and undervalued.
In terms of yields, TB’s fundamental yields dwarfs the benchmark US risk-free-rate of 1.8% with an earnings yield, OCF yield and FCF yield of 17.8%, 20.5% and 16.8% respectively (see chart 1). Short-term liquidity is decent for the company, given a current ratio of 1.5 times and quick ratio of 0.8 times. An improving cash position, debt to equity ratio of just 30.7%, and a comfortable interest coverage ratio of 10.1 times denotes that the company’s balance sheet is safe and strong. TB currently trades at a deep 33% and 46% discount for its P/E and EV/ebitda compared to its regional peers, indicating that it is one of the relatively more attractive stocks among its peers.
Going after VR market
TB’s strategy going forward will be to focus on the massive US$148.8 billion addressable gaming market, particularly the e-sports and VR market which expects double-digit growth this year and which would significantly improve TB’s revenue and profits. Other strategies include building and maintaining a highly curated list of gaming, e-sports and pop culture athletes, gaming streamers, personalities and brand partners. Recently, TB partnered with music streaming giant Tidal for exclusive free streaming offers on TB headsets sold on its website, as an example of this strategy. TB is also looking to expand its gaming keyboard and mouse portfolio and geographies, aided by its recent acquisition of ROCCAT. The expected upcoming release of the Gen 8 Xbox and PlayStation in November should provide earnings visibility over the next 12 months.
In its 3QFY2019 results statement, Turtle Beach said it expects a 15-20% CAGR for its revenue, 15-30% CAGR for its ebitda and gross margins around 35% for the next few financial years ahead. Analysts believe these targets are achievable. TB is a consensus “buy” according to Bloomberg’s poll of analysts, with a target price of US$18.20, more than double its current price of US$8.80.
We think the market has overlooked the potential of the company due to the recent acquisition which dragged down short-term financials. As a market leader with fairly strong financials and a tremendous potential for growth, we believe this stock has a potential upside of at least 40% based on in-house valuations, and a great stock for risk-seekers, especially investors hunting for better shorter-term returns.
