Turtle Beach: Acquisition costs lead to 1Q losses but record 2Q sales seen as gamers play on
Nasdaq-listed Turtle Beach Corp (TB) is a global gaming accessory company and solutions provider specialising in headset and audio peripherals. To recap, TB is the global market leader in console gaming headsets for 10 years and running, with over 150 issued patents and strong partnerships with leading e-sports teams and influencers. In May 2019, TB acquired Roccat, a German-based gaming accessories company. This expanded TB’s traditional gaming headsets portfolio to include gaming mice, keyboards and other accessories. TB was one of our portfolio’s top performers, posting a strong 73.8% return in half a year compared to the other three benchmark indices, the Dow Jones, S&P 500 and MSCI US which lost 9.7%, 5.2% and 4.7% respectively.
Since TB is part of the gaming industry, the impact of Covid-19 has been mostly positive on the company. In fact, in the latest earnings report, the management said that as a result of government mandated stay-athome orders, TB’s March and April revenues exceeded historical levels as the overall gaming and headset markets experienced an unprecedented surge in demand. Industry conditions are stronger than ever before, as the global gaming audience now exceeds global cinema and music markets with over 2.5 billion active gamers worldwide. TB’s business model is diversified and resilient as it does not just cover a wide range of gaming accessories, but also has an innovative product portfolio for all levels of gamers, ranging from entry-level to professional e-sports gamers, with a large range of prices.
For 1QFY2020 ended March 31, TB’s results outperformed most of the analysts’ expectations. Compared to 1QFY2019, TB’s net revenue dropped to US$35.0 million ($48.7 million) from US$44.8 million, while the company made a loss of US$3.6 million compared to a net income of US$3.1 million. The loss was attributed to the inclusion of costs associated with the Roccat acquisition. TB’s management has guided a very strong 2QFY2020 where it expects sales to range between US$74 million and US$77 million, compared to US$41.3 million reported in the 2QFY2019. The company continues to maintain its gross margins at a stable level of 30%. Liquidity and solvency ratios of the company are excellent, with a current ratio of 2.0 times and debt-to-equity ratio of just 3.2% respectively. TB’s free cash flow yield is also very attractive at 7.9%.
Moving forward, TB plans to expand and invest in its Roccat portfolio and further develop the brand for the financial year. The release of Microsoft’s Xbox and Sony’s PlayStation should also be a catalyst for TB’s growth and strong performance in the upcoming quarters. The company strategy also includes partnering with leading influencers in the e-sports industries, which should increase the marketing exposure of the business. Given there is still US$3 billion in the global gaming accessories market up for grabs, TB’s market leader status in this area is set to expand through its diverse portfolio of products.
TB has four “buy” calls, one “hold” call and no “sell” calls, with a target price of US$18.20, which is well above its trading price of US$14.45. We think TB has strong growth potential over the long term and we very much like the management’s approach and strategy of expanding the business. We would place the fair value of the company at 25% above its current trading price for the next six months. TB is a great stock for those seeking to invest in companies that have been positively impacted by the virus over the short term and will grow strongly in value over the next few years. E