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Bear of the Day: Turtle Beach (HEAR)

Kevin Cook
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Turtle Beach (HEAR) has been banished to the dungeon of the Zacks Rank as EPS estimates for this year just imploded 53% in the past few weeks from $1.76 to $0.83.

 

This represents a 73% drop from last year's $3.05 and confirms what many skeptics said about the maker of gaming headsets during the rush of new players into Fortnite "battle royale" style games in 2018: it's just a flash in the pan.

 

Turtle Beach has sold more than 30 million gaming headsets since entering the market in 2005. The feat was achieved through a steady demand for high-quality audio hardware for gaming console makers and their platforms like Microsoft’s (MSFT) Xbox One, Sony’s (SNE) PlayStation4, and Nintendo's (NTDOY) Switch. 

 

Per the 2019 Video Game Sale Statistics by NPD Group, Turtle Beach has been the market leader in gaming headsets by units for the past seven consecutive years, with more than 12 million more headsets sold life-to-date compared with its nearest competitor. The company has also achieved the distinction of being the leading player in the industry by revenues for the past nine consecutive years.

 

The gaming headset TAM (total addressable market) has been estimated to be over $1 billion. And bullish analysts last year were calling for even greater sales growth from Turtle Beach as the company expanded into other peripheral devices like keyboards and mice.

 

But current sales estimates from analysts call for a consensus under $250 million in 2019, representing a slide of 15% from last year.

 

The catalyst for downward revisions to sales and profits for HEAR was the company's Q4 report on March 14 where management gave earnings guidance that was well below what Wall Street analysts were modeling.

 

"We had a terrific fourth quarter, which capped off a truly transformational year for Turtle Beach," said CEO Juergen Stark. "We achieved record sales and profits, eliminated our long-term debt and maintained disciplined spending, all of which culminated in a dramatic increase in shareholder value.

 

"In a year of strong market growth, we outperformed the market. According to NPD, our North America market share ended 2018 at 46.1% versus 42.4% in 2017, which positions us as the clear leader in the console gaming headset market."

 

The company also announced the acquisition of a German PC gaming accessory business, ROCCAT, for $19.2 million.

 

"This is a dynamic and strategically important deal for Turtle Beach," said Stark. "We are adding a complementary portfolio of PC gaming mice and keyboards, a skilled PC accessories team, and a highly synergistic distribution footprint.

 

"The acquisition is also a key step in achieving our goal of building a $100 million PC gaming accessories business in the coming years. ROCCAT accelerates our expansion into the roughly $1.6 billion PC gaming headset market, as well as directly enables us to address the roughly $1.3 billion PC gaming keyboard and mice market."

 

Turtle Beach shares lost 1/3 of their value -- from $16 to under $11 -- by March 26 after that report. They have since recovered the $12 level as some investors and analysts see compelling value now. 

 

Wedbush analyst Michael Pachter raised his price target from $22 to $30. This analyst once had a $40 PT on HEAR last year.

 

“We continue to view Battle Royale as far more than a fad, and think it will last for many years,” Pachter wrote in a research note to clients. “Turtle Beach has ridden the wave of Battle Royale popularity, but the company’s core products have been favored by gamers playing multiplayer games for most of this decade. Turtle Beach is the favored brand among console gamers, and as we see an uptick in multiplayer and Battle Royale gaming, the company should continue to gain share.”

 

Despite this analyst's long-term optimism, we need to see the earnings estimates stop going down and start going back up to recommend long positions. The Zacks Rank will let you know.

 

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