Turtle Beach (NASDAQ: HEAR)
Industry leader in high quality gaming audio
Company Overview
Turtle Beach (“HEAR”) is an American gaming headset and computer accessories company established in 1975 and headquartered in New York.
Launching the first ever console gaming headset in 2005, Turtle beach has grown to be the North American market leader in gaming headsets for the last ten years while maintaining a 40% market share. Turtle Beach expanded its product offerings beyond headsets to include peripheral devices such as keyboards and mice with the acquisition of ROCCAT in 2019 for $15.6 million in cash and $3.3 million in earnout payments. ROCCAT is a leading German peripherals business with a history of producing award-winning keyboards and mice.
HEAR IPO’d at $6.80 in 2010 as Parametric rocketing up to over $80 in March 2013 before changing their name to Turtle Beach in 2014. The stock has seen a volatile decade since then now resting just above $20 and a roughly $320 million market cap, despite posting over $300 million in revenue for 2020.
Business Fundamentals
Company Financials
In their most recent Q3’20 earnings, Turtle Beach recorded a revenue increase of 141% year-over-year (“y/y”) from Q3’19 with $112.5 million in revenue, and gross margins increase of 880 basis points to 41%. Adjusted EBITDA in Q3’20 was $27.6 million, compared to $0.3 million in the prior year quarter,with a margin of 24.5%. The company has continued to benefit from the current stay-at-home environment that has bolstered an influx of new gamers, driving the strong y/y growth.
As of Q3’20, Turtle Beach has significantly cleaned up it’s balance sheet by increasing their cash balance 233% from $8.2 million at FYE19 to $27.3 million while also repaying $26.6 million of outstanding debt under its revolving credit line, reducing outstanding debt to $0. Total assets were $201.5 million, liabilities were $105.8 million at Q3’20. The company generated operating cash flow of $44.7 million, free cash flow of $40.5 million, and working capital cash inflows of $70.9 million in Q3’20.
Revenue streams
Turtle Beach offers an array of headset gaming products across Xbox, Playstation, Ninentendo, and PC systems that vary in quality and price.
The 2019 acquisition of ROCCAT expanded their portfolio to include gaming keyboards and mice as they continue to expanded into the PC accessories market.
Industry and competitive landscape
Market Size
According to Grand View Research, the 2019 gaming peripheral market was $3.88 billion and is expected to grow by 10.4% CAGR from 2020 to 2025 to $6.96 billion. This trend has been accelerated as a result of the coronavirus pandemic and rapid increase in the number of gamers.
According to Newzoo, there were 2.47 billion gamers worldwide averaging a 5.9% year over year increase since 2014. It’s expected to reach 2.725 billion by 2021.
Competitive strategy
Turtle Beach has a number of competitors in the peripheral space that include SteelSeries, Razer, Logitech, Corsair, and Mad Catz.
In the gaming headset market Turtle Beach dominates with a roughly 40% market share. On their Q3’20 earnings call, Turtle Beach announced a quarterly revenue share of over 50% and quarterly share of units of headsets shipped over 60%. They continue to shell out high quality gaming headsets at affordable prices for all levels of gamers. Competitors such as SteelSeries or Logitech also offer higher priced premium headsets, although none can match the equilibrium between quality and price that Turtle Beach offers. This is evidence by the recent launch of the Stealth 600 Gen 2 Headset for Xbox and PS5, which continues to be the #1 selling wireless gaming headset on the market.
Growth strategy
While Turtle Beach’s recent success in 2020 was driven by the stay-at-home orders during the coronavirus pandemic, much of this growth is expected to continue. As cited in their most recent earnings call, Activate consulting firm found that console gaming has increased 27% in 2020 and more than half of this increase is expected to remain once the world returns to normal. Similarly, they estimate that time spent on PC gaming is up 30% as a result of stay-at-home orders and this should settle to about 10% once we return to normal.
Additionally, Turtle Beach will continue to benefit from the new rollout of new generation consoles for Xbox and PlayStation. Market Research Firm DFC forecasts that console unit sales will increase 55% in 2021 and this rate will continue higher into 2022 as we start to see new edition next generation consoles.
Raising their investment from $9 to $12 million for 2021 in their most recent earnings call, Turtle Beach will continue take advantage of it’s excellent cash position. Much of Turtle Beaches current re-investments are going to be targeted towards building the ROCCAT brand as they continue their growth strategy into the PC accessories market. The ROCCAT brand already has an established brand in its German market of origin but Turtle Beach will be looking to take this investment global. The Turtle Beach team has made clear of their goals to create a $100 million PC accessories business.
As a result of these positive trends and growth outlook, Turtle Beach gave guidance of $330 million in sales for the full-year 2020, up from an estimated $300 million in their previous guidance. $330 million in sales would represent a 40% year-over-year increase and a 5 year CAGR from 2015 of over 15%.
E-sports Partnerships
They have partnerships with EA sports and Estars Fortnite, the leading independent production company for e-sports and video games. In March 2020, Turtle Beach announced an expanded partnership with NRG e-sports. While Turtle Beach serves as the official audio partner of NRG, ROCCAT supplies keyboards, mice, and other accessories to Apex Legends, Call of Duty, Fortnite, and Rocket League players.
Additionally, they have dozens of gaming influencers and Ambassadors including the likes of Dr. Disrespect, Ali-A, Castro, and NBA-player Josh Hart.
Risks
Maintaining a Competitive Economic Moat
The gaming peripherals space is a very crowded market with somewhat low barriers to entry. While Turtle Beach continues to maintain their market share through strategic pricing and quality products, they face stiff competition from better capitalized companies. While Turtle Beach has expressed their goals to tap into the growing peripherals market, there are still questions that their team will successfully execute their strategy. It is difficult to protect and commercialize new technologies in this space and pricing power is key as competitors copy new technologies.
Supply Chain Constraints
The Covid Pandemic has sent a ripple through global supply chains sending companies through logistical headaches. This includes securing everything from airfreight to ocean containers. As a result sales could be lost if competitors can implement more efficient supply chains to keep up with demand. Q3 factory headset production in units was almost 90% of the total headset unit production in Q3 2019. However as the globe weathers the pandemic into Q2 of 2021 these constraints will continue to ease for the broader market.
Execution Beyond the Pandemic and Next Generation Consoles
The growth that Turtle Beach has seen during FY 2020 is unlikely to remain at these levels as the double tailwind of the Covid pandemic and next generation console release simmer away. However, this company and the broader peripherals market will continue to grow as the organic growth of gamers increases across the globe well into the coming decade.
Stock Technicals
Turtle Beach is one of the cheapest peripheral companies you can own in the public markets today. Trading at a 9x price-earning ratio, this pales in comparison to the Communication - Components industry that currently trades at around 26.43x earnings. On a more specific basis, competitors Razer and Corsair are currently trading at 588.24x forward P/E and a 49.73 P/E. Logitech trades at a fair valuation of 24.33 P/E. Clearly on a relative basis, Turtle Beach is as cheap as you can get in this sector which is surprising for such a household brand in gaming that continues to show consistent growth.
Turtle Beach did have a short lived rally past $30 in the summer of 2018 after posting encouraging sales on the back of the Fortnite Battle Royale craze. However, the stock came back down to earth in 2019 after announcing modest earnings as investors decided the stock had run too far too fast.
The reality is that 2020 is not 2018 for a multitude of reasons and I believe this stock has plenty more room to run from here. Starting with the Covid Pandemic, this resulted in a surge of increased gaming across the globe. Certainly this growth trend is bound to come down but the residual effects of the pandemic has given a steroid shot to the CAGR in all sectors of gaming that many companies, including Turtle Beach, will continue to benefit from well into 2022-2023. Additionally, we have a new generation of consoles that will continue to give tailwinds to the peripherals market for years to come. And lastly, the organic growth of gamers across the global will continue into this technological era despite help from stay-at-home orders.
Thanks for reading, let me know your thoughts or criticisms.
Seacow
Submitted January 03, 2021 at 07:58PM by MarketSeacow https://ift.tt/3rNtrHD
