Coming back to HEAR, bought some more today

To avoid burying the lede (I feel if anything I can get to be too verbose sometimes), I bought some more shares of Turtle Beach today and wanted to highlight it for the simple fact that I think it is super cheap, I’m not vain enough to think anyone is, or should, be looking at my for Buy signals.

I wrote about Turtle Beach (HEAR) last November and since then the stock has dropped from $15 to $9. But the story is far from what these two numbers would lead you to believe.

From my article in November, “Currently the market is valuing HEAR as if sales will completely revert back to pre-battle royale levels. This is just not going to happen. While we are not going to see an 80% top-line growth number in 2019, and may even see a modest decline, HEAR is positioned with a clean balance sheet to drive profitable growth beyond 2020. Management has identified adjacent growth initiatives and now has the balance sheet to pursue these…After a normalization year in 2019, with revenue off slightly from 2018, I would expect HEAR to deliver continued growth as it continues to dominate the console headset market while building market share in the PC headset market. The PC market increases HEAR’s addressable market by about 50% and the company will begin targeting a 10-20% market share in the next couple years…FCF and EBITDA could both fall 50% and HEAR would be trading around a 10% FCF yield and less than 10.0x EV/EBITDA.”

EBITDA is expected to fall by about 50% in 2019 but at $29mm, the company is trading only at a 4.7x multiple (EV assumes that HEAR used the revolver to finance the $15.6mm purchase of Roccat). I expect FCF to be ~$22mm this year, giving us a very attractive FCF yield.

Mentioned above, the company purchased ROCCAT to gain a greater entry into the PC gaming market and it also opens up more doors to Europe and Asia.

I still remain confident in Turtle Beach’s ability to dominate the console headset market. The acquisition of ROCCAT provides a platform to address the PC market which is just as large as the console market (company is targeting getting ROCCAT sales from $30mm currently to $100mm). Looking at Logitech, they trade at about a 17x EBITDA multiple. I’m not calling for that type of premium valuation on HEAR as I see the differences in the respective businesses, but a <5.0x multiple is way too cheap to me. That’s why I bought more today and will likely buy more in the near future as long as this basement price persists. I’m hoping the company has been executing on its $15mm buyback program at these sub-$9 prices!