2 Year Market Growth of 4 various catergories
4,000,000,000
3,500,000,000
3,000,000,000
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
0
When examining the various categories in which Turtle Beach competes over the last few years, it becomes apparent that the company has faced several headwinds. Primarily, these challenges have stemmed from a relative decrease in sales following the lockdown and stay-at-home activities driven by the pandemic.
Aquisition and Discontinuation:
Historically, I view Turtle Beach's acquisitions as substandard, often resulting in a significant waste of resources and proving to be a net negative in the long run. For example, the acquisition of ROCCAT in 2019, aimed at strengthening Turtle Beach's position in the PC accessory market, ultimately ended recently. The $19 million acquisition divided Turtle Beach's resources, leading to a refocus solely on the Turtle Beach brand. Despite this, there was no specific mention of the lacklustre performance of the ROCCAT brand in their most recent annual filings and quarterly conference calls. Actions speak louder than words; if the brand had indeed been successful in driving strong growth and profits in the PC segment, I am certain ROCCAT would have been celebrated and touted by management as highly successful.
This isn't management's first setback in attempting to expand beyond the specific console headset niche, resulting in failed products despite significant investment and resource allocation. The original Hypersound venture experienced a slow demise: despite substantial investment following the completion of the reverse merger in 2013, the anticipated results failed to materialise. In 2016, to implement cost-saving measures, the business underwent restructuring, and direct sales were phased out in favor of a licensing model, aiming to significantly reduce costs. However, the product ultimately fizzled out, with the highest sales recorded in a year amounting to less than $1 million. The failure of Hypersound was evident in the 2017 10-K report, with impairment of goodwill totalling $63.2 million in 2016 and $49.8 million in 2015. Furthermore, the HyperSound business had been incurring operating losses since the spin-off of Parametric Sound Corporation from LRAD Corporation in 2010, indicating considerable challenges from the outset, which ultimately stacked the odds against Turtle Beach's success from day one.
Gaming
PC Gaming Headset Controler/Gamepad Game Simulator 2021 2022 2023
Console
Headset
Upon commencing my research on Turtle Beach back in March, I was initially drawn to the absence of debt within the company, a factor I perceived as a notable strength for its future prospects. However, this dynamic has shifted following the recent transaction involving Performance Designed Products (PDP), which amounted to $116.9 million. This deal, comprising a $79.9 million cash transaction financed through debt, alongside a 3.45 million share issuance to PDP proprietors, has altered the company's overall financial position and diluted shareholders' ownership. Given the company's prior experience with the ROCCAT acquisition, I harbour reservations regarding this latest venture and its entry into the gaming controller sector. Given management's past performance, any growth stemming from this deal warrants vigilant observation. Should the outcomes fail to meet expectations, it risks mirroring the fate of the ROCCAT acquisition. Additionally, the hefty price tag of this transaction, six times the cost of ROCCAT, amplifies the stakes, with potential adverse implications for the company. It is imperative that any debts incurred as a result of this acquisition are promptly addressed to mitigate the company's vulnerability. The pursuit of growth through leverage poses inherent risks, necessitating meticulous oversight.
Furthermore, it is worth noting that management is aware of the impact share issuance can have on shareholders and has proceeded to significantly dilute their shareholder base. From my perspective, the actions taken by management seem to lean more towards a disregard for the shareholders who own the company rather than pure incompetence.
Throughout the company’s history, it has become common knowledge that the management tends to be highly dilutive for shareholders. A notable example of this occurred in 2020 when the company sold a total of 237,813 shares of its common stock under the Sales Agreement in the open market, at an average gross selling price of $18.39 per share, resulting in net proceeds of $4.4 million.
Another concerning aspect of their most recent acquisition, PDP, is that the cash component of the transaction has been funded with debt from their revolving credit facility, which is variable. If interest rates unexpectedly increase, servicing this debt could significantly heighten the fragility of the company and leave it vulnerable to bankruptcy.
Cyclical Nature of the Business and Stock Price:
Outside of headsets, their expansion into other areas began thereafter, gaining momentum back in 2019. Simultaneously, the company realises it cannot rely solely on its niche for growth. With a significant market share already established, it's unrealistic to expect substantial further growth
solely within the console headset industry. Following unsuccessful attempts to sell itself to potential buyers in 2022, several prospective buyers noted that too much revenue comes from gaming headsets, rendering revenue excessively cyclical1
The expansion into PC headsets through acquisition appears logical on paper: the PC market is considerably larger than that of consoles. Leveraging the Turtle Beach brand to drive sales and capture a portion of the PC market share seems like a strategic move.
With their focus on diversifying their product mix, the predictable boom cycles stemming from new console releases are likely to diminish. From an investment perspective, the historically predictable up cycles stand a high chance of diminishing in the next cycle, expected to begin sometime in 2026–2027 (more on this below).
It's worth noting that Turtle Beach has made significant strides in diversifying their product mix. In their 2023 10-K, they even highlighted that, for the first time, nearly 25% of Turtle Beach revenues in 2022 were derived from categories outside of console gaming headsets.
The strength of the gaming market is heavily influenced by the successful release of major game titles. Instances of weakness, such as the 2016 holiday season, led to contractions in the overall market, negatively impacting Turtle Beach and resulting in lower sales. This pattern aligns with the biannual occurrence of successful releases, as highlighted in the Q4 2018 conference call. The following year, the successful release happened to be Fortnite. Logistically, this can have ripple effects on supply, significantly impacting earnings. For example, in 2017, sales to retailers were considerably lower than usual due to inventory buildup resulting from weak sales during the 2016 holiday period. This cautious approach by retailers in ordering new stock was due to excess inventory from Turtle Beach's previous stock. Consequently, suppliers maintained lower stock levels towards the year-end, anticipating suppressed sales. However, the unexpected success of Fortnite towards the end of 2017 caught everyone by surprise, leading retailers to demand more supply than usual. The key takeaway from this is that predicting and planning for the success of a game release in advance is extremely challenging. This unpredictability makes achieving efficiency difficult, resulting in missed profits.
The gaming peripherals market exhibits a high level of cyclicality, particularly on an annual basis, with each fall (September through December) accounting for approximately 45% of all product sales, largely due to the Christmas shopping season when many headsets are purchased. However, this cyclicality is both predictable and likely already factored into the price of Turtle Beach’s stock. When large earnings reflecting this rapid increase in sales are reported, the share price typically does not see a significant rise in response. This is widely anticipated by every analyst following the stock, and investors who understand the industry have likely already incorporated this factor into their valuation of the company. Therefore, it is safe to conclude that this factor alone cannot be relied upon to gain an edge on the stock.
Historically, two main factors have been instrumental in driving Turtle Beach’s stock price: the release of new gaming consoles and the subsequent surge in demand for headsets. This trend is evident in both 2013 and 2020, coinciding with major console releases occurring approximately every 7-8 years, as illustrated in the chart below:
1 Turtle Beach told shareholders it is exploring a sales process, https://www.reuters.com/technology/turtlebeach-told-shareholders-it-is-exploring-sales-process-2022-05-05/, Access Date 09/05/2024
However, the release of highly successful games is less predictable. One notable example in recent history is the release of Fortnite Battle Royale, which significantly boosted Turtle Beach's net revenue by 92.7%, as reported in their 2019 10-K.
The unexpected success of Fortnite can be gauged from the price of Turtle Beach stock, which started at below $1.50 at the beginning of 2018 and skyrocketed to over $32 per share at the height of the Fortnite craze, within just 7-8 months.
It's crucial to note that Turtle Beach has significantly underperformed the stock market in the periods between console releases. This trend is supported by the data provided in their 10-K reports, as outlined below:
2015 10-K:
In contrast, when assessing the stock price in line with recent console releases:
...and the rapid increase following the previous generation console release in 2013.
2022 10-K
As you can see, the stock wildly outperformed.
Management:
From my assessment of Turtle Beach, the overall strength of management in decision-making appears lacking. There's a sense of inconsistency and contradiction in their decisions. For example, the discontinuation of ROCCAT within the PC segment poses a threat to the Turtle Beach brand, as PC headsets are now being reintegrated under the Turtle Beach brand. Juergen Stark highlighted the risks of brand dilution in the Q4 2020 conference call, using enterprise headsets as an example. At that time, the three brands under their possession (Turtle Beach, ROCCAT, and Neat) were seen as a way for management to expand their presence in the gaming peripherals market without diluting any single brand, allowing for expansion while leveraging each brand's strengths. ROCCAT was intended to enable Turtle Beach's expansion into the PC segment while allowing Turtle Beach to maintain its focus on the console segment. However, in hindsight, it seems that the ROCCAT brand was not as successful as anticipated and did not achieve significant traction in the PC market. Now that PC products are being reintegrated under the Turtle Beach umbrella, there's a risk of diluting the brand, which management aimed to avoid in 2020.
2015 10-K
It is evident that the Turtle Beach brand has been utilised across an expanding array of markets within the broader gaming peripherals sector. However, it is rightly concerning that the strength of the Turtle Beach brand may be diluted over time, especially if ventures outside of console headsets fail to meet expectations, as seen with ROCCAT. In addition to this, there are other areas of management that raise concerns. One method I favour for assessing alignment is by examining insider purchases or sales of shares. Below, I have outlined some of the highlights:
• Terry Jimenez, serving as non-executive Chairman of the Board, has significantly increased his stake in Turtle Beach stock, doubling his position from 19,051 shares in May of the previous year to 40,909 shares as of May 19, 2024.
• Lee Katherine Scherping, a member of the Turtle Beach board, has made two small purchases of 500 shares each in Turtle Beach in 2023.
• William Wyatt, who was appointed to the board of directors on May 8th, 2023, promptly purchased 12,500 shares the following day. This appears to be closely tied to his new role on the board.
While the recent insider purchases are encouraging, there remains a notable lack of significant share ownership among executives at Turtle Beach, coupled with a high level of share dilution. Both are warning signs but together more than constitute a red flag. This is apparent from the screenshot from Simply Wall St taken on May 19, 2024, where insider ownership accounts for just over 2% of outstanding stock.
Furthermore, there has been significant upheaval within the senior management team over the past year. For example, CEO Juergen Stark resigned from his position as CEO of Turtle Beach, effective June 30th, 2023. The fact that all insider sales since 2023 have originated from Juergen Stark, all occurring in May of 2023 shortly after his resignation, raises questions. It leads one to wonder if the sale was motivated by his resignation and if he held the shares solely due to his role as CEO. This suggests to me that he lacked enduring confidence in the company from the outset.
Simply Wall Street provides a useful visualisation of the management and board's experience, offering a mixed view that leans toward the negative.
Management:
The
Board:
Collectively, there is very little insider ownership, and the board comprises individuals who may lack significant experience.
Finally, another red flag that I had not initially considered is the continuous increase in the CEO's compensation despite Turtle Beach remaining unprofitable.
Fundamentals and Financial performance
The first area that caught my attention in the first quarter since the acquisition of PDP is the deterioration in the company's balance sheet. One notable aspect is the increase in long-term debt, which has surged from nothing to almost $46 million. Additionally, there has been a significant increase in goodwill on the asset side. While it's expected that goodwill would increase with the recent acquisition, the several hundred percent surge in this value, particularly for something as difficult to determine as the excess value linked to the PDP brand, raises concerns. Such a sharp increase in goodwill is susceptible to impairment if expectations are not met. Hopefully, the situation doesn't escalate to the extent seen with the Hypersound business, especially considering that PDP's products operate in a market that is less niche and specialised compared to Hypersound.
Circa 10-K Q4 2023
Unfortunately, a significant portion of the goodwill value is derived from "synergies," which often turn out to be less value accretive than initially expected. If we were to compare a list of companies that added value through acquisitions with those that lost value, the latter list would be much longer. This gives me cause for concern and almost always results in acquisitions being viewed as expensive in retrospect.
Historically, Turtle Beach management has been known for aggressively diluting shareholders, and this new purchase of PDP, partially funded by equity, continues this trend with a 16.4% dilution. While it's common for acquisitions to be funded through new share issuance, a profitable company would have a higher likelihood of paying for such purchases with cash, assuming that management's capital allocation had built up a sizeable cash reserve to deploy. Unfortunately, it's the long-term shareholders who end up bearing the brunt of this dilution.
In summary, Turtle Beach acquired PDP for a total of $116.9 million. This transaction can be broken down into approximately $74.7 million paid for the identifiable net assets and $42.2 million paid above this value, related to goodwill, reflecting the value of the company's brand and other intangibles.
And now 10-Q Q1 2024
Additionally, we can utilise the data provided in their most recent 10-Q to evaluate the performance of Turtle Beach excluding PDP over the last year.
Until the end of March 2024, PDP has contributed $5.9 million to the company’s top-line income statement. Therefore, deducting this contribution from the income statement, we have a revenue of $49.95 million compared to $51.44 million in the last Q1, indicating a decrease of 2.9%.
From the above screenshot, the reference to PDP’s net revenue over the same period not being material stems from the fact that the business is unprofitable. This is evident from the unaudited results included in the 10-Q, which show a net income loss of $2.5 million.
Overall, my assessment of PDP is mixed, as it's difficult to determine whether its acquisition will actually add value to the overall company only a few months after its acquisition. This is something that will become clearer over the following few years. However, I am concerned about the increase in debt, and I also question whether the goodwill factored into the acquisition of the company is excessively high. In other words, Turtle Beach may have overpaid for the business.
Moving on to my long-term assessment of Turtle Beach’s financials, I always like to focus on the track record of growth over at least a decade, should the information be available.
Fundamentals
Upon analysis of the company's fundamentals over a ten-year time horizon, Turtle Beach has averaged around a 30% gross margin. Unfortunately, this gross margin has been eroded by expenses, resulting in losses in net income for 6 out of the last 10 years. It's worth noting that all profitable years (2018 – 2021) came as a result of the Fortnite craze and the subsequent release of nextgeneration consoles, along with the COVID lockdown boom. As will be seen in subsequent analysis of Turtle Beach, the 30% profit margin is around the industry average, with competitors like Razer and Corsair coming in lower, and GN Store Nord and Logitech coming in higher. Much of the higher margins come from products outside of the gaming apparel space, so an accurate upper bound is hard to determine for the industry. Nevertheless, Turtle Beach performs quite well on this front.
2023
Taking a look at the overall growth in revenue from $178,470 to $258,122 from 2013 to 2023, we come to an annual growth rate in revenue of 3.72%. Knowing that the overall Games and Accessories market has grown at around 8% when factoring out the extreme rise in sales from the COVID lockdown environment, and the 5% achieved by the overall Games and Accessories market, we can see that Turtle Beach has underperformed. However, while the data used only dates back to 2017 as a point of comparison, using Turtle Beach’s revenue figures from 2017 onwards to get an exact comparison yields more promising results. As revenue has grown from $149,135 to $258,122 over the 6-year time span, annual revenue growth is 9.74%. My conclusion, looking at both figures, is that growth will continue to increase in line with the Games and Accessories Market, with the broad expansion within the industry increasing revenue over time.
Moving onto the balance sheet, three specific lines warrant further discussion:
Firstly, the revolving credit facility demonstrates a historic level of usage by Turtle Beach, and their recent acquisition has expanded their usage of debt to levels significantly above their historic upper bound range of just under $40 million.
Gross Profit Margin
29.25%
20.48% 2021 35.04% 2020 37.15% 2019 33.54% 2018 37.82% 2017 34.20%
24.49%
25.00%
27.21%
28.20% Average 30.22%
2022
2016
2015
2014
2013
Debt now stands at just under $46 million or a 15% increase over the previous upper-bound usage. However, I do not find this too concerning with their guidance following the aquistion projecting a revenue increase by well over $100 million using their lower bound estimate.
Additionally, management have also done a very good job at paying down their revolving credit facility. During the last cycle of extreme growth, the company made a financially prudent decision to pay off their outstanding debt and keep any borrowing relatively low, as can be seen between 2018 and 2023.
Second to the above point is management's long-term reduction in total liabilities between 2013 and 2023. This demonstrates management's commitment to strengthening their balance sheet over time. However, their recent purchase of PDP will have dramatically increased their total liabilities due to the large increase in debt issuance. I anticipate this increase to reduce drastically over the coming years if historic trends persist into the future.
My final point on the balance sheet is the choppy shareholder value. Over the long term, there has been inconsistent growth, demonstrating weakness in the overall business. However, when overlaying the cyclical nature of the industry and business with this metric, it is clear that from 2018 to 2021, shareholder value dramatically increased by 277%. This helps demonstrate that as an investor, the cyclical nature of the industry makes timing and entry a very important factor to consider.
Finally, moving onto the cash flow statement, in line with the cyclical nature of the industry, it dictates whether the company actually generates revenue from its operating activities. More often than not, cash flows when the market goes into its rapid upswings, with highly successful game releases like Fortnite and new console releases every 7-8 years, as can be seen below.
It is also worth noting that while cash retained at the end of each financial year has increased substantially from 2013 to 2023, there is no clear increase over time. More cash is retained when revenue skyrockets as expected and slowly reduces when the hangover effects kick in around 2 years after a new console release (albeit a highly successful game release could prevent this).
Competitors
GN Store Nord
GN Store Nord A/S is a Danish manufacturer of hearing aids, speakerphones, videobars and headsets.
From the outset, it's evident that the business is not solely dedicated to the gaming industry but has its operations split between Hearing, Gaming, Consumer, and Enterprise sectors. While this diversification isn't necessarily negative and may have some strengths to counteract the highly cyclical gaming headset industry, having such a diversified mix could potentially result in poor decision-making in the future. A lack of focus puts SteelSeries at risk in the future if the brand's focus reduces. This aspect wasn't apparent when reviewing all annual reports produced since 2021 when SteelSeries was acquired, but it's certainly something to keep an eye on.
As depicted in the graphic below from their most recent 10-K, SteelSeries represents just one of many segments within the business, specifically falling under the company's GN Audio division.
The reach of SteelSeries products may indeed be broader. While Turtle Beach mentions selling headsets in 40+ countries, GN Store Nord states its products are available in 80+ countries worldwide. However, their annual reports do not break down the total countries specifically for SteelSeries operations.
Unlike Turtle Beach, GN Store Nord has remained profitable, as evidenced by the net revenue data spanning from 2019 to 2023. However, it's important to note that their bottom line has significantly shrunk since then, showing potential signs of weakness within the company. Nevertheless, the fact that the company is profitable demonstrates an income statement in far better shape than Turtle Beach. Net income has been compressed to 266 million DKK, which translates into roughly $38.53 million dollars as of May 23, 2024. Unfortunately, data from SteelSeries specifically cannot be found as it is not broken out.
Another interesting point worth considering is the gross profit margin of GN Store Nord's audio division, which has been far in excess of Turtle Beach. Up until 2021, gross margins had consistently ranged between 50.4% and 51.6%, significantly higher than the 30% profit margins seen by Turtle Beach. Even with the more challenging environment post-COVID, the profitability of GN Audio, despite dropping 15% from 2021 compared to 2023, remains far higher at 43%. However, it's important to note that GN Audio consists of more than just SteelSeries, so the gross profit margins may vary. Nevertheless, it's reasonable to assume that SteelSeries' gross profit margins are the same or higher than Turtle Beach's. Therefore, there's a leaning towards SteelSeries being more profitable in comparison to Turtle Beach, though there are uncertainties in this assessment.
SteelSeries reported organic revenue growth of 17%, indicating an increase in market share in a stabilised market. This growth was attributed to the strength of their updated product lineup. However, it's important to note that SteelSeries' final quarter includes the fall of 2023, typically a period when the majority of revenues are generated in the headset and gaming accessories market. Therefore, it's reasonable to assume that market trends similar to Turtle Beach's may follow, suggesting that the actual annual revenue increase may be lower than 17%. Turtle Beach achieved approximately 7% revenue growth from 2022 to 2023, providing a benchmark for comparison.
Based on the available data, SteelSeries reported revenues of DKK 2.7 billion as of December 2021, equivalent to approximately $405 million USD at the prevailing exchange rate of $0.15. This revenue figure suggests that SteelSeries is roughly 10% larger than Turtle Beach, which reported revenues of $366 million USD for 2021, representing the peak of the COVID pandemic.
Considering the lack of separation in SteelSeries' annual reports, it's challenging to ascertain the volatility of its earnings. Assuming a decrease in revenue similar to that of Turtle Beach, which experienced a 29.5% decline from 2021 to 2023, SteelSeries' revenues may have shrunk by over 20%.
Using this estimation, SteelSeries' revenues could be around DKK 1.9 billion or approximately $276 million USD.
Considering these estimates, SteelSeries' revenues could be around 6.5% larger than Turtle Beach's. Therefore, I would estimate the size of SteelSeries to be between 6-12% larger than Turtle Beach, based on the provided data points. This suggests that Turtle Beach may face challenges in capturing market share from a competitor backed by a profitable company with greater resources.
When evaluating the management of GN Audio, it's important to acknowledge a blend of both positive and negative decisions.
A prime example of GN Audio's strategic manoeuvring is their decision to pause their share buyback program in October 2021, which had been launched in May of the same year and had reached a substantial amount of DKK 1,148 million before being halted. This move reflects a prudent effort by GN management to deleverage, showcasing responsible capital allocation practices. While the extent to which external factors influenced this decision remains uncertain, it's evident that their considerable indebtedness likely played a significant role.
On the other hand, the acquisition of SteelSeries in January 2022 presents a contrasting perspective. It occurred at a time when market valuations were at their peak post the Covid-19 surge, reflecting the exuberance within financial markets. The purchase price of 8 billion DKK, equivalent to $1.24 billion, underscored this exorbitant valuation. Had the acquisition taken place in the current market climate, it would likely command a substantially lower price tag.
Moreover, projections leading up to the acquisition were predicated on the unprecedented growth witnessed during the pandemic, which subsequently dwindled in 2022, resulting in significant revenue declines. Even with data from Turtle Beach for all of 2023, which offers insights into SteelSeries, revenues still remain notably below pre-pandemic levels. This disparity underscores the elevated cost of the acquisition, driven by statistics that were inflated and eventually regressed to the mean.
This scenario highlights a potential lapse in prudent capital allocation, as the decision to acquire was made during a period of prosperity rather than during challenging times. Additionally, despite the reduction in long-term debt, the substantial increase in short-term debt has offset the benefits of long-term debt reduction. This nuanced financial situation is evident in the balance sheet screenshot extracted from their 2023 annual report.
Indeed, it's important to acknowledge that there has been an overall reduction in indebtedness, aligning with management's stated objective to deleverage. Despite the increase in short-term debt,
the overarching trend of decreasing indebtedness reflects a concerted effort to strengthen the company's financial position. This strategic move towards reducing debt levels could potentially mitigate risks associated with high indebtedness, thereby enhancing the company's resilience in the face of economic challenges.
The narrowing of SteelSeries' product portfolio in 2023, driven by profitability improvements, is indeed a notable development. While this move may not inherently be negative, it warrants attention as cost-saving measures could potentially lead to lower-quality products. Moreover, the reduced diversification in products may diminish market presence and pose a risk to the brand, particularly as gaming enthusiasts often seek specific products from various competitors. Balancing profitability with product quality and a diverse product portfolio will be crucial for sustaining longterm success and brand reputation in the competitive gaming industry.
Finally, the low level of insider ownership, comprising less than 0.2% of outstanding shares as of May 25th, 2024, is indeed a significant red flag. This minimal insider ownership suggests a lack of alignment between senior management and the company's long-term interests. Insider ownership typically signals confidence in the company's future prospects and a commitment to its success. The absence of substantial insider ownership may raise concerns among investors regarding management's incentives and priorities, potentially impacting trust and confidence in the company's leadership.
Overall, GN Store Nord is significantly stronger financially and boasts a robust brand presence within the PC accessories market, a segment where Turtle Beach is likely to face challenges. The company maintains consistent profitability compared to Turtle Beach, providing it with greater flexibility to pursue investment opportunities within SteelSeries. While management has made strides in reducing leverage post the acquisition of SteelSeries, there are concerns about overpayment. Furthermore, there is a risk of diluting the brand's value in pursuit of enhanced profitability. Finally, SteelSeries is just one of many segments within GN Store Nord, unlike Turtle Beach, which is solely focused on gaming.
Corsair Gaming, Inc.
Similar to Turtle Beach, Corsair Gaming, Inc. is a prominent global provider and pioneer in highperformance products designed for gamers and digital creators, including streamers. The company operates through two main business segments: Gamer and Creator Peripherals, and Gaming Components and Systems. In the Gamer and Creator Peripherals segment, which directly competes with Turtle Beach, Corsair offers a wide range of high-performance gaming peripherals such as keyboards, mice, headsets, controllers, and streaming products like capture cards, Stream Decks,
microphones, audio interfaces, Facecam streaming cameras, studio accessories, and gaming furniture. Conversely, the Gaming Components and Systems segment focuses more on individual components for building custom gaming systems, including high-performance power supply units (PSUs), cooling solutions, computer cases, DRAM modules, as well as high-end prebuilt and custombuilt gaming PCs and laptops, and gaming monitors, among others.
The significant scale of Corsair's business is evident, with revenues reaching $1.46 billion and $1.38 billion in 2023 and 2022 respectively. In 2023, its revenue was over 4.5 times larger than Turtle Beach's $258 million. However, despite its size, Corsair struggles to leverage economies of scale effectively, as the majority of its 25% gross profit margin is consumed by administrative costs. The company failed to turn a profit, with a net loss of £2.59 million for the full year in 2023, highlighting the capital-intensive nature of the industry. Although the net loss represents only 0.18% of net revenue, it's noteworthy that Corsair, despite its larger scale, experienced a revenue decline similar to Turtle Beach, with total revenue falling by 27.8% from around $1.9 billion in 2021 to $1.375 billion in 2023.
Examining the balance sheet, there are mixed signals: while cash increased by approximately 14%, the rise in inventories suggests potential future discounts, driving lower profit margins. Additionally, short-term debt surged by almost 88%, though long-term debt decreased by around 20%. The overall book value of the company has increased by roughly 8% since 2022, yet these warning signs may dampen confidence.
On a more positive note, Corsair has steadily increased free cash flow since the Covid surge and slump that impacted the industry. For instance, cash increased from around $65.3 million in 2021 to $178.5 million in 2023, a notable 173% rise. In contrast, Turtle Beach saw a 50.36% decrease in free cash, from $37.7 million to $18.7 million, during the same period. Overall, Corsair's cash flow statement presents a more favourable picture than Turtle Beach's.
In terms of gross profit, the Gamer and Creator Peripherals segment mirrors levels achieved by Turtle Beach, ranging from the low to mid-thirties. While individual gross profit margins by product are not provided, the consistency in these margins suggests an upper bound for gaming accessories. It's worth noting that the Gaming Components and Systems segment's profitability may explain why Turtle Beach has not ventured into this less profitable market segment.
However, despite the Gaming Components and Systems Segment contributing a significant portion of the net revenue overall, primarily from DRAM modules (31.2% and 34.3% of net revenue for the years ended December 31, 2023, and 2022, respectively), this reliance on one product type introduces fragility into the company's revenue stream. Before assessing such a large company, I expected the revenue to be more diversified, similar to GN Store Nord. The lower gross margins of this segment mean that a large percentage of revenue does not translate into bottom-line profit.
Additionally, the net revenue of the Gamer and Creator Peripherals segment decreased by $42.9 million, or 9.8%, in 2023 compared to 2022 for Corsair. This decline is significant, especially considering that Turtle Beach actually increased its overall net revenue in 2023 compared to 2022 by just under 7%. While this is only one data point and requires further analysis, it suggests that Turtle Beach may have gained market share at the expense of competitors like Corsair.
Examining 2022, weak demand following the surge in demand from the Covid pandemic led to large inventories for Corsair, resulting in net losses in both 2023 and 2022. This issue of excess inventory is a key concern within the industry when demand diminishes. Turtle Beach highlighted a similar issue back in 2016–2017, resulting in a lack of supply when the Fortnite craze peaked in the first half of 2018.
Furthermore, management at Corsair is focused on expanding market share through acquisition, exemplified by their purchase of Drop in July 2023. Similar to Turtle Beach, Corsair aims to acquire companies within the broader gaming accessories market to capture a larger portion of the total addressable market. Acquiring well-recognised names within their niche can reduce the dilutive effect of trying to incorporate everything under one brand, maintaining brand loyalty among gamers. However, the risk lies in the parent company's potential lack of specialisation and understanding in the acquired areas, leading to value-dilutive decisions.
It's also worth noting the cyclical nature of this sector, which tends to outperform broader indexes every 7–8 years. However, due to the lack of historical stock performance data (Corsair listed on the NASDAQ on September 23, 2020), this data cannot be verified. Nonetheless, the elevated share prices around the time of new console releases and the surge in demand during the Covid pandemic indicate the sector's cyclicality and its impact on market performance.
When examining insider ownership in the graphic below, we observe a higher level of inside ownership within the company compared to Turtle Beach, albeit still relatively small.
The vast majority of insider ownership at Corsair Gaming is held by the current CEO, Andrew Paul, who is one of the company's co-founders and has been at the helm for 30 years. Having a founder as CEO is a significant positive indicator, or "green flag," as it often suggests that the leadership is deeply aligned with the company's long-term success and interests. Founder-CEOs typically have a vested interest in the company’s prosperity and often exhibit a strong commitment to its mission and vision. In Andrew Paul’s case, his long tenure and leadership have been instrumental in driving the growth that has positioned Corsair as a leading entity in the gaming and digital creator market.
Moreover, the experience and continuity provided by a founder-CEO like Paul are particularly valuable when the company is pursuing a growth strategy that includes acquisitions. Such a strategy can often be risky and potentially value-dilutive if not managed properly. The presence of a seasoned and knowledgeable leader at the top provides stability and can enhance the chances of successful integration and value creation through acquisitions. In this context, Paul’s leadership not only aligns with shareholders' interests but also brings the necessary experience to navigate the complexities of growth and expansion in a challenging market.
However, it's important to note that the CEO, Andrew Paul, holds the majority of the shares owned by insiders. Specifically, his stake constitutes 2.61% of the total 3.17% insider ownership, as illustrated in the graphic below:
What raises some concerns is the notably low level of insider ownership among other executives, which only amounts to 0.56% and includes just three individuals, including the CEO founder. This figure is significantly lower than the eight insiders at Turtle Beach. This discrepancy suggests a lack of alignment among the management team collectively, and this warrants a cautious outlook.
Razer
Unlike the competitors previously mentioned, Razer went private at the end of 2021, making up-todate information less accessible. However, the financial data available up to the end of 2021, including the COVID-19 surge period, is still relevant for an assessment. Razer competes directly with Turtle Beach but focuses more on products dedicated to PC users. Specifically, Razer engages in the design, manufacture, distribution, and R&D of gaming peripherals, systems, software, services, mobiles, and accessories. The company is divided into hardware and software segments, with the hardware segment further subdivided into peripherals and systems. Turtle Beach competes with Razer in the peripherals segment, which saw revenue growth of 27.1% in 2021 and 26.9% in 2020, indicating significant expansion.
Razer, like its competitors, is a much larger company than Turtle Beach, with 2021 revenues of $1.62 billion. Assuming similar revenue trends post-2021, Razer's size is estimated to be 10-15% smaller
than Corsair. Key insights from the financial data show a downturn in sales in the latter half of 2021, marking the peak of the COVID-19 surge. This is mirrored in the historical share price trends.
Analysing Razer's financial statements reveals a mixed picture. A key positive is the absence of debt on its balance sheet. However, a decrease in book value is a downside. Similar to other competitors, Razer experienced significant revenue growth in 2020 and 2021. Profit margins stood at 24%, comparable to Corsair's 25%, but bottom-line profit was significantly eroded by high selling and marketing expenses. Net profit at the peak of the COVID surge was just 2.68% of revenue, amounting to only £800,000 in 2020. This highlights the challenges of achieving profitability in this industry, even during favourable conditions.
While recent data is unavailable, Razer is still led by its co-founder Min-Liang Tan, which is highly positive for the company, akin to Corsair. CEO ownership ranges from 1.96% to 5.26%, assuming no changes since going private. Despite the encouraging CEO involvement, the lack of significant shareholding by other directors raises concerns about overall alignment within the company. Nevertheless, having an active founder at the helm is a substantial positive factor, potentially outweighing the limited ownership by other executives.
(a) Long positions in the Shares of the Company
(b) Long positions in the shares, underlying shares and debentures of the associated corporations of the Company
Overall, Razer, like Turtle Beach, attracts customers primarily through its brand, which serves as a key competitive advantage. The majority of Razer's revenue up to 2021 was generated during the COVID surge, with significant contributions from increased gamer spending potentially linked to new console releases. However, distinguishing the exact impact of console cycles on Razer's revenue is challenging, especially since the company has gone private.
Despite these challenges, it is highly positive to see a founder, Min-Liang Tan, leading Razer, similar to Corsair's leadership structure, which contrasts with Turtle Beach's executive team. The industry itself
Name
Nature of interests Number of Shares held Approximate percentage of shareholding(1) Min-Liang Tan (“Mr. Tan”) Beneficial owner Personal interest 171,352,557(2) 1.96% Founder of a discretionary trust Other interest 2,837,935,801(3) 32.40% Tan Chong Neng Beneficial owner Personal interest 4,311,470(4) 0.05% Lim Kaling (“Mr. Lim”) Beneficial owner Personal interest 1,654,444(5) 0.02% Interest of controlled corporations Corporate interest 2,053,174,085(6) 23.44% Chau Kwok Fun Kevin Beneficial owner Personal interest 1,883,352(7) 0.02% Founder of a discretionary trust Other interest 600,000(8) 0.01% Lee Yong Sun Beneficial owner Personal interest 1,369,710(9) 0.02% Gideon Yu Beneficial owner Personal interest 5,418,672(10) 0.06%
of Director Capacity
Company in which the Nature of Number of Percentage of Name of Director interests are held Class of shares Capacity interests shares held shareholding(1) Min-Liang Tan THX Ltd. Common stock Beneficial owner Personal interest 900,000(2) 5.26% Lim Kaling THX Ltd. Common stock Interest of controlled corporations Corporate interest 3,420,000(3) 20.00%
operates on very slim profit margins, making competition fierce and creating a substantial barrier to entry for new participants. Razer remains a significant player in the PC segment, posing intense competition for Turtle Beach as it strives to gain market share.
LOGITECH INTERNATIONAL S A
Logitech designs software-enabled hardware solutions that support businesses and foster connectivity in work, creative, gaming, and streaming environments. Their diverse portfolio spans Gaming, Keyboards & Combos, Pointing Devices, Video Collaboration, Webcams, Tablet Accessories, and Headsets. All these products are categorised under a single operating segment: Peripherals.
Although not explicitly stated as part of their business strategy, Logitech has shown an inclination toward acquiring value-accretive companies. Their overarching strategy emphasises leveraging the brand's recognition, which has been meticulously built since its founding in 1981. One particularly appealing aspect of their approach is the focus on scaling operations to reduce overall costs.
Turtle Beach directly competes with Logitech G, Logitech's division dedicated to gamers and streamers. This division offers a range of products, including mice, racing wheels, headsets, keyboards, microphones, and streaming services. Like Turtle Beach and other competitors, Logitech experiences peak sales from October to December, aligning closely with the fall season and holiday shopping trends.
Logitech's extensive history has enabled it to in-house manufacture around 40% of its components. However, the company still relies on third-party contract manufacturers for the remaining 60%, making its model a hybrid one, unlike Turtle Beach, which fully outsources manufacturing. This approach provides more stability compared to its competitors but also introduces geopolitical risk due to its manufacturing operations being based in China. The growing tensions around Taiwan present a potential threat that may be underappreciated in their risk assessments.
In their annual report, Turtle Beach, Corsair, and Razer are identified as competitors concerning Logitech's gaming division. When assessing the competitive threat posed by Logitech, it appears their brand is more focused on delivering value rather than cutting-edge technology. Consequently, their customer base likely comprises more casual and everyday gamers, as opposed to the enthusiast or professional e-sport gamers targeted by high-end competitors.
Regarding management, the current team at Logitech raises some concerns. CEO Johanna (Hanneke) Faber and CFO Charles Boynton both joined Logitech in 2023, with Faber only assuming the CEO role in December 2023. Her previous experience at Unilever does not align closely with her new responsibilities at Logitech, contrasting sharply with the founder-led leadership at Corsair and Razer. While this lack of tenure and domain-specific experience is not an outright red flag, it suggests that the effectiveness of the new management will need to be demonstrated over time.
Analysing insider ownership, Logitech's CEO holds only 19,519 shares out of 153,863,262 outstanding shares, equating to just over 0.01%. This minimal ownership, coupled with a short tenure, indicates a lack of alignment with the company's long-term interests, particularly when compared to the more substantial insider ownership seen in competitors.
Given the considerable size and diversified portfolio of Logitech, it is evident that its share price has not deviated significantly from overall market trends, unlike companies solely focused on gaming accessories. The company benefited from the stay-at-home surge during the COVID-19 pandemic, which positively impacted the entire PC accessories industry, including but not limited to the gaming segment. This broader exposure has helped Logitech maintain less volatility in performance compared to its more niche competitors.
Notably, Logitech’s gaming segment, while substantial, positions the company third behind Corsair and Razer but still significantly larger than Turtle Beach. This context highlights the competitive landscape and explains why Turtle Beach is striving to capture market share from these larger players. The opportunity for Turtle Beach to grow its business several-fold is apparent if it can successfully compete and gain traction against these dominant companies.
Logitech, like its peers, has not been immune to the gaming sector's decline during fiscal year 2024, experiencing a 4% drop in gaming sales compared to fiscal year 2023. This decline was primarily driven by reduced sales of gaming keyboards, Blue Microphones, and Streamlabs services. Operating expenses for Logitech remain high, constituting 27.7% of total revenue in 2024, consistent with industry standards where operating margins typically fall in the mid-to-high 20% range. This high expense ratio often results in minimal net profits across the sector.
Financially, Logitech stands out as the most robust among its competitors. Its net income exceeds 14% of total revenue, a stark contrast to others in the gaming segment. Logitech's overall revenue, more than double that of Corsair and 15 times that of Turtle Beach, underscores its dominance in the computer and gaming accessories market. Its diversified portfolio has helped it maintain profitability during the broader gaming market downturn, though it has also seen a 21.5% revenue decrease since 2022, similar to other companies in the sector. This reflects the post-COVID normalisation affecting all players in the industry, with Logitech being no exception.
Logitech's balance sheet is particularly strong, with over $1.5 billion in cash and no debt, showcasing its financial stability. However, the company's book value has remained relatively flat, indicating limited growth in line with its income statement. The cash flow statement reinforces Logitech's mature, cash-generating status, a position many competitors aspire to reach.
In conclusion, Logitech is a formidable competitor, stronger than all others in the gaming accessory market. Despite its financial strength, Logitech's management team appears less suited to the gaming industry compared to competitors led by founders or more gaming-focused leaders. Logitech's products are also less recognised within the gaming community, which could limit its appeal to dedicated gamers—a core audience for Turtle Beach.
Logitech is the only competitor consistently achieving profitability, largely due to its diversified portfolio. While its gaming-specific revenue, primarily from the PC segment, does not directly threaten Turtle Beach's dominance in the console market, the overall competitive landscape presents significant challenges. The cyclical nature of the industry and the difficulty in sustaining profits highlight the challenges Turtle Beach faces. I do not foresee a return to profitability for Turtle Beach until the next console release cycle around 2027-2028.
Valuation
To value this company, I employed a straightforward discounted cash flow (DCF) model using conservative assumptions. My goal is to recover my investment over an 8-year horizon, aligning with the typical console cycle, and to determine a fair price for a business that is generally unprofitable except during peak earnings at new console releases.
I assumed a 5% growth rate, consistent with the broader gaming and accessories market. For the valuation, I used the last year of positive free cash flow from operations, back in 2020, as a baseline, anticipating that this figure will reflect future performance, especially considering potential increases due to the acquisition of PDP in the next earnings increase driven by new console releases. This provides a conservative estimate.
Given the challenges previously discussed, I applied a 50% discount rate. This accounts for issues such as high shareholder dilution, which has seen outstanding shares grow from 5,258,020 in 2012 to 19,389,000 in 2024, representing a compounded annual growth rate of 12.23%. The discount also reflects the overall risks and uncertainties surrounding the company’s financial stability and profitability.
Before applying a 50% margin of safety, I estimate the value of Turtle Beach at $26.40 per share. Thus, I would consider purchasing Turtle Beach if the share price drops to $13.20 or below.
Although the overall business quality is substandard compared to the broader industry, there is still substantial room for growth. As of June 3, 2024, Turtle Beach is valued at $16.25 per share, with a total market capitalisation just under $350 million.
Although my valuation of $13.20 per share suggests that Turtle Beach is not currently a buy, there is a very real possibility that this entry price could be reached between now and 2026, depending on PDP's success. Combined with the cyclical nature of the industry, the next generation of console releases expected around 2027-2028 could mark an ideal entry point. I anticipate that the share price will increase substantially as the market begins to anticipate next-generation announcements sometime in 2026.
Summary of Strengths and Weaknesses:
Pros:
Strong brand recognition
Operates in a relatively predictable cyclical market environment
The industry's low profit margins and the necessity of strong brand presence create significant barriers to entry, making it exceedingly challenging for new entrants to establish themselves.
Cons:
Reliance on a single supplier for certain critical components
Expansion efforts to reduce cyclical market exposure and increase Total Addressable Market (TAM) may risk diluting brand strength
High volume of share issuance has historically been detrimental to investors
Lack of consistent profitability
Dependence on the unpredictable success of major game releases
Low inside ownership of the stock
Inexperienced senior management team
A strong dollar reduces overall profitability, especially since a significant portion of revenue is derived from the United Kingdom and Europe
Conclusion
In summary, Turtle Beach presents itself as a non-traditional choice for value investors due to the abundance of challenges overshadowing potential opportunities. However, I believe there remains a window for favourable investment in the future, contingent upon favourable valuation and timing, particularly aligning with the anticipated new console releases in 2027-2028. Evaluating the data, Turtle Beach operates within a growing market trajectory that is expected to persist, driving revenue expansion in the years ahead. Furthermore, the potential for substantial revenue growth accompanies the success of new console releases, typical within the 7–8-year console cycle. Fundamentally, Turtle Beach grapples with a fiercely competitive landscape where profitability is elusive, characteristic of the industry at large.
While expansion beyond its core console headset niche poses challenges, competitors boast larger market shares and greater resources, particularly within the PC gaming headset segments. Concerns regarding management's ability to navigate a more diversified product range linger, especially given their recent appointment compared to the experienced founders leading Corsair and Razer. Despite this, I perceive a promising medium-term outlook as the gaming sector accelerates, benefiting all players in the industry. Turtle Beach's robust brand loyalty among dedicated customers offers a solid foundation, albeit with the ongoing challenge of sustaining brand awareness.
In considering future investment opportunities, Turtle Beach warrants attention, particularly for its potential within a broader portfolio. While acknowledging its competitive disadvantages, I see merit in allocating a portion of capital to Turtle Beach in the future, contingent upon favourable riskadjusted returns compared to other options on my watchlist.
Bibliography:
The below access dates represent the first time I accessed the corresponding content for each piece of source material used when constructing the above analysis
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