Turtle Beach (HEAR): Too Expensive!

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Turtle Beach (HEAR) is running like a gazelle following the market’s optimistic take on the first quarter financial results released Wednesday.

But we’re expecting a nice correction long before Turtle Beach reports next quarter’s net loss.

The headset company did see revenue grow to $40.89 million in the first quarter and a net income of $2 million… quite commendable.

But company guidance shows some disappointment ahead in the second quarter. While revenue is expected to rise, net losses are also expected to return. Anticipated net loss is $-0.05 per share, the company states. Those losses will ramp up the $-168.69 million accumulated deficit.

Meanwhile, the market has gone overboard on optimism and ignored the losses and challenges, including the onerous risk of a headset division built on finicky adolescent gamers.

The popular battle games “Fortnite” and “PlayerUnknown’s Battlegrounds” were credited for the quarter’s improvement. The challenge here is that today’s popular game may become tomorrow’s loser.

And there are other issues that make this stock appear risky right now…

*1. Declining Interest

Searches for Turtle Beach headsets have recently slumped, according to Google Trends.

“Turtle Beach XO Three,” was Googled most during Nov. 19-25 and Dec. 24-30. Interest dropped from 100… down to the April 29-May 5 timeframe of just 13:

(Source: Google Trends)

Peak popularity of “Turtle Beach Ear Force” hit Dec. 24-30. Search interest plunged into the April 29-May 5 timeframe to just 40 and near the end of the May 6-12 timeframe, the figure is 34.

(Source: Google Trends)

“Turtle Beach Stealth” searches dropped 67% from December to May 5th, falling in at just 33.

(Source: Google Trends)

*2. Rivals Racing

Meanwhile, Turtle Beach headsets didn’t even make the cut in PC Gamer’s 2018 review of gaming headsets.

In the review released earlier this week, Turtle Beach’s arch rivals Kingston HyperX Cloud Alpha and Arctis Pro GameDAC earned top honors.

Other headsets that received favorable comments in this veritable bible for gamers were models by Logitech, Creative and Corsair.

(Source: PC Gamer)

Both the Google search trends and PC Gamer’s snub raise questions of whether Turtle Beach could begin to see deterioration in market share.

*3. Adding To Rally 

The stock is rising again this morning, following a Wedbush “outperform” rating and 12-month price target increase from $4 to $12.50. The stock is trading around 34% higher… suggesting a significant drop may be just ahead.

Meanwhile, adding to the enthusiasm may be a report by Research Driven Investing, RDI, distributed on Yahoo Finance:

But not all investors understand that this report needs to be read as an advertisement:

Here is part of the Research Driven Investing disclaimer:

*4. Majority Owners Sell

Big shareholders recently dumped around $2 million worth of Turtle Beach stock.

Just last month, two members of a group with a 10% stake in the company unloaded 330,128 shares combined.

On April 16-17, Frederick Romano sold a whopping 320,128 shares for around $4.50 to $5, cashing out at around $1.5 million:

Days earlier, shortly after the April 6 1-for-4 reverse stock split, group member Carmine Bonanno sold 10,000 shares, amounting to a roughly $425,000 payday.

(Source: Company SEC filing)

These shareholders took profits while the price was less than a third of today’s levels. It makes sense that more big stakeholders want to sell into this rally.

*Conclusion

Turtle Beach is still the same company it was two weeks ago, when the ~$5 share price was justifiable. Now the forward price-to-earnings has reached a real head-in-the-sand ratio of 324.

We expect Turtle Beach will soon stop in its tracks and drop to around $11 per share short-term.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in HEAR and stand to profit on any future declines in the stock price.

* Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected]

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