Turtle Beach (NASDAQ:HEAR) has gained attention as its stock has surged. The San Diego-based manufacturer of gaming headphones has emerged from penny-stock status as it profits from a currently popular gaming niche. After starting the year at below $2 per share, Turtle Beach stock now hovers in the $22 range.
However, multiple companies, most of whom benefit from a larger size, also compete in this segment. Given the volatile, fickle nature of its industry, investors should treat Turtle Beach stock only as a speculative trade.
HEAR Stock Finds Its Niche
Despite the surge in the HEAR stock price, concerns remain. Turtle Beach supports a market cap of about $300 million. However, it competes in a gaming industry where its largest peer, Microsoft (NASDAQ:MSFT) supports a market cap well over 2,000 times that size.
Not to mention other better-established headset makers such as Bose or Sony (NYSE:SNE) which have sold headphones for decades. Still, Turtle Beach traces its origins as far back as 1975. It has seen the popularity of its products come and go, yet it manages to innovate and stay in business.
The latest surge in popularity revolves around gaming. Turtle Beach headphones have gained popularity around the so-called “battle royale” games. Games such as Fortnite enjoy an enhanced experience with these headphones.
Moreover, game launches often happen in October in anticipation of the Christmas shopping season. Games such as Call of Duty and Red Dead Redemption, which will see updated versions, should add an incentive to own these headphones.
HEAR Stock Turns a Profit
Also, for a smaller company, the company supports surprisingly solid financials. Analysts forecast profits of $2.42 per share during the current fiscal year. With a Turtle Beach stock price of about $22 per share, this takes the price-to-earnings (PE) ratio to about 9. They also predict consensus revenues to $264.95 million. This represents an increase of 77.7% from last year’s levels.
However, investors should note that growth forecasts appear mixed. Wall Street predicts that the forecasted 964.3% surge in income this year will be replaced by a 20.7% drop in income next year. They also do not believe profits will exceed 2018 levels until 2021.
The Speculative Case for Turtle Beach stock
While I recognize the dangers to HEAR stock, I also see its compelling valuation. Even if profits fall to the predicted $1.92 per share in 2019, that takes the forward PE to only about 11.4. Moreover, small tech stocks which grow in popularity often see triple-digit PE ratios, if they hold the profit to justify the PE at all. For this reason, I could justify a small, speculative position.
The difficulty with such a position involves knowing if and when to sell. It remains possible that Turtle Beach stock could become the Roku (NASDAQ:ROKU) of gaming headphones. That would give HEAR more long-term staying power.
Still, the stock saw a surge to as high as $84 per share in 2013 before falling back to a trading range in the single digits. If “battle royale” gaming proves to be a fad, that could happen to Turtle Beach stock again.
The Bottom Line on HEAR stock
Both historical trading patterns and the fickle nature of Turtle Beach’s popularity indicate that investors should treat HEAR stock as a speculative trade if they buy the stock at all. HEAR has greatly benefitted from the popularity of “battle royale” gaming as its headphones have flown off the shelves.
However, tech hardware remains a difficult business. Multiple companies offer headphone products and could attempt to compete with Turtle Beach. Moreover, gamers could lose interest in this type of gaming, which would send the stock back to levels it saw before its surge.
Yes, many will find the single-digit PE ratio compelling. Even I admit that such a multiple could justify a speculative position. However, winning with such a stock involves knowing if and when to get out, which can become a struggle even for experts. If one possesses some gambling money, they might want to bet on HEAR stock. However, if the notes turn sour, these investors should also not hesitate to turn off HEAR stock if that time comes.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.