(HEAR - Free Report
) is a $260 million maker of headphones for gamers whose stock exploded higher this year after surprising investors and analysts with big sales and profit growth.
In fact, its sales this year are expected to grow 78% and exceed its market cap, giving it a very attractive price-to-sales valuation of under 1.0.
This growth is coming from the newest craze in the $138 billion global gaming market known as "battle royale" where as many as 100 online opponents play last-man-standing fantasy combat simulations.
The most popular games in this realm are Fortnite, Players Unknown Battleground (PUBG for short) and Activision
's (ATVI - Free Report
) Call of Duty. And where Turtle Beach comes in is with high-tech headphones that can hear in 360 surround-sound. Gamers crave this advanced technology -- in styles, sophistication and price ranges from $25 to $250 -- because it's the only way to hear one's opponents sneaking up on them.
Profit Estimates Move Higher
Two weeks ago the maker of must-have high-tech gaming headsets pre-announced Q3 results slated for November 6.
On Wednesday 10/11, Turtle Beach raised its Q3 guidance for revenue to $73–74 million from $65 million previously, for adjusted EBITDA to $17 million from $11 million previously, and for EPS to $0.74–0.78 from $0.44 previously.
Accordingly, analysts responded by raising the Zacks Q3 EPS consensus 64% from $0.47 to $0.77. And that's why HEAR is a Zacks #1 Rank Strong Buy again this year.
Wedbush analysts, who have a $42 price target on HEAR shares, think that Turtle Beach headsets will be a hot holiday gift for gamers. And they see a trend of upgrading around major October game launches like Call of Duty and Red Dead Redemption produced by Rockstar Games, a unit of Take-Two Interactive
(TTWO - Free Report
And November brings the much anticipated Battlefield V from Electronic Arts
(EA - Free Report
) . In the Wedbush view, this positions Turtle Beach to surpass its previously implied Q4 guidance.
Though I'm not a gamer, I was amazed during the August Gamescom keynote by NVIDIA
(NVDA - Free Report
) CEO Jensen Huang held this year in Cologne, Germany where Battlefield V previews were featured.
Huang wowed the gamer/developer crowd with amazing views, stats and demos on NVIDIA's record-breaking new "deep learning" architecture called Turing, featuring RTX image and light reconstruction/simulation powers that computers teach themselves.
That's something to look forward to as I'm also an NVDA investor. But more currently, I'm hearing the Call of Duty gamers are loving the new Black Ops 4 edition and they need Turtle Beach headsets to play it well.
Oppenheimer analysts have a $35 price target on HEAR as they also see strong international opportunities for Turtle Beach headsets.
The bullish analysts also see a big market for the company as they expand into PC gaming headsets and other peripherals. Here's a slide from a September Turtle Beach investor presentation that shows the "TAM" (total addressable market) for their various product lines...
What's the Bear Case for HEAR and How Credible Is It?
The bear case is simply that this company is a flash-in-the-pan. Specifically, the bears believe that so-called "battle royale" gaming will peak soon, or players won't upgrade very often, and then these headsets will be collecting dust on warehouse shelves.
That's why when you look at the Zacks Detailed Estimates page you don't see any growth for next year, in sales or profits.
Analysts themselves don't know how to model the growth much past a quarter or two because the company keeps surprising and pre-announcing -- which is why the stock suddenly went from $5 to $20 this spring in what I call a "growth state change".
And of course, Q3 sales could be a near-term peak as orders from Best Buy and Walmart would have been placed already for the holidays.
Oppenheimer is still modeling only $206 million in sales next year and just $1.05 EPS. But not every bank's numbers are on the Detailed page right now.
Wedbush is at $295 million (11% growth) and $2.54 EPS for 2019.
But the one thing that's hard to imagine is how fast the company can keep growing into a TAM of nearly $3 billion across various devices and platforms.
Key Facts of a Big Market Opportunity
- Gaming is now considered a $138 billion market
- Turtle Beach makes the #1 console headset for Xbox and Playstation
- 7 of top 10 selling console headsets are Turtle Beach
- 4 of top 5 selling 3rd-party headsets are Turtle Beach
- Multiple price points of technology sophistication from $25 to $250
- Product sales in 42 countries with over 260K points of distribution
A Whale Who Wants to HEAR Everything Too
Legendary growth investor Jeff Vinik, owner of the NHL's Tampa Bay Lightning, took a 6.4% stake in Turtle Beach in September with his buy of nearly 900K shares around $19. And this is not his first foray into e-sports.
Writing for the Tampa Bay Times on Sep 24, Richard Danielson noted that last year Vinik invested in and became one of four co-chairmen at the gaming and e-sports company aXiomatic, based in Los Angeles. The company is the majority owner of Team Liquid, with a roster of professional gamers who have broken records and won championships in a variety of online games. The paper quoted Vinik...
"I’ve watched the growth of the e-sports industry for a number of years, and the opportunity to become involved with the impressive group already assembled at aXiomatic is the ideal way for me to make an impact," Vinik said in an announcement of his investment.
Also of interest is that one of Team Liquid’s partners is the Amazon-owned website Twitch, whose livestreams of gamers are watched by millions of viewers every week.
Danielson also quoted from a Barron’s interview that Vinik did last year where he discussed his investment in aXiomatic and mentioned the area of sports media rights as an opportunity worth tracking.
"We’re coming into an interesting five to 10 years," Vinik said. "Sports continues to be the only content that people really have to watch live. That gives it the ability to be commercially sponsored in ways no other media can.
"Obviously, people are watching less traditional TV and watching through other media like laptops or smartphones or tablets, and more is being watched digitally," he added. "The delivery mechanism is changing. It’s not only major networks bidding on sports rights. Now Amazon is a distributor of NFL Thursday Night Football in the country. There’s potentially a great new source of demand for sports media. It’s tough to handicap: I’m bullish, though I don't want to be pinned down to a specific number" on the upside investment potential.
Bottom line for Turtle Beach (HEAR - Free Report) :
The stock carries the potential risk of being a one-year wonder. So investors will be listening close on Nov 6 when the company reports and gives an outlook for Q4 and beyond. We'll know a lot more then about how well they are penetrating that $3 billion market. I think the potential reward is worth the risk as the stock currently trades between 7 and 9X EPS.
Disclosure: I own HEAR and NVDA shares for the Zacks TAZR Trader portfolio.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.