Turtle Beach’s Q2 Beat, Market Strength Drive Sell-Side’s Bullishness

The popularity of online gaming is driving up demand for headsets and benefitting Turtle Beach Corporation (NASDAQ: HEAR); three sell-side analysts doubled down on their bullish stances after the company’s second-quarter print.

The Analysts

• Wedbush analyst Alicia Reese reiterated an Outperform rating and raised the price target from $31 to $42.
• Oppenheimer analyst Andrew Uerkwitz reiterated an Outperform rating and raised the price target from $31 to $35.
• D.A. Davidson analyst Tom Forte reiterated a Buy rating and raised the price target from $28 to $38.

The Thesis

Turtle Beach is demonstrating both substantial market growth and improved operations, both of which are boosting earnings, Wedbush’s Reese said in a note. 

The world of battle royale gaming continues to dominate the market; “Fortnite” drove substantial results Turtle Beach, as the company capitalized on the phenomenon, the analyst said. PlayerUnknown’s “Battlegrounds” also proved to be a key catalyst in the 86-percent jump in the headset market, she said.

“This ‘Fortnite’ phenomenon exposes a large audience to multiplayer games, which is greatly enhanced by communication and directional audio cues. ‘Fortnite’ is bringing a massive swath of new gamers into console, PC, and mobile gaming, which should benefit Turtle Beach for years to come, particularly as several new battle royale-type games are forthcoming.” 

Oppenheimer’s Uerkwitz commented on Turtle Beach’s potential for market expansion in light of the growth in console headsets. Turtle Beach deems the replacement cycle for the products to be an average of 24 months, the analyst said. The data helps drive Oppenheimer’s bullish thesis.

“We believe fundamentals remain favorable for HEAR as a healthier balance sheet allows the company to invest in growth initiatives beyond 2018. A potentially expanded installed base allows for sustainable long-term growth for replace/upgrade demand.” 

D.A. Davidson’s Forte considers the company well-positioned for the exploitation of battle royale gaming, the shift into e-sports and the future of capital structure. “We see the company’s $100-million shelf filing as a means for further improvements to its capital structure (having ended the quarter with $31 million in debt) and, potentially, a mechanism for shrewd M&A to advance its long-term product strategy, including PC headsets (near-term) and additional gaming accessories such as keyboards and mice (long-term).” 

Turtle Beach reported $61 million in second-quarter sales Monday against a $47.9-million estimate, up 218 percent year-over-year. Adjusted EBITDA were $9.8 million compared to $2.8 million in Q2 of 2017. 

Price Action

Turtle Beach shares were up 1.12 percent at $30.69 at the time of publication Tuesday. 

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“Fortnite” screenshot courtesy of Epic Games.