by Travis Johnson, Stock Gumshoe | February 28, 2019 3:31 pm
Today it’s time for a look at another overheated James Altucher pitch, this time for Altucher’s Top 1% Advisory ($2,000, no refunds)
The big idea this time is that he’s teasing a “social media killer” and, of course, “one little company” that he thinks will be the big winner of this “killer” trend.
What is it? Here’s a little taste of the ad:
“… the demand for this ‘Social Media Killer’ is INSATIABLE…
“Millions of people are flocking into it…
“Investopedia wrote that there is ‘no question this is changing the landscape…’ and has created ‘an opportunity for investors to cash in.’
“And there is ONE company that has positioned itself exclusively to collect the lion’s share of all these profits.”
I’ll let the cat out of the bag a bit here — this “social media killer” is eSports and online gaming and game streaming in general, and the phenomenon that is the battle royale game Fortnite in particular. The trend is of people playing more video games live and socially online, and of people also watching other gamers play games either online or in big live arena tournaments and professional eSports video game leagues.
This is not a new idea, of course, it’s been teased by a few folks over the past year or two and I’ve been watching some of the big eSports and gaming companies and considering some purchases (haven’t bought anything yet), but it’s somewhat difficult to find a “clean” investment in this trend. The biggest obvious candidates, the major video game publishers who are driving a lot of the eSports leagues and publishing most of the games, are also suffering because they have all lost mindshare and market share to Fortnite in the past couple quarters, so their share prices have collapsed and scared everyone off… and you can’t really invest in Fortnite directly, since it’s owned by a private company (Epic Games), and the publicly traded companies who are part-owners of Epic, notably the Chinese tech giant Tencent, are so huge that Fortnite doesn’t really register on their income statement.
I’m guessing that a position in Activision Blizzard or Electronic Arts at prices near where they stand now will probably end up being profitable (I went into those in some detail when the Fool had a similar video gaming tease two weeks ago), since the trend of increased video gaming will be with us for a lot longer than Fortnite is likely to be able to keep its perch atop the business, but the past few months make it a little scary… and Altucher clearly isn’t pitching these huge companies, so what is it that he’s got in mind?
Here’s a little more from the ad:
“Forbes wrote that this opportunity is “something that’s continuing to grow, and at a rapid pace.”
“They know there is still tons of room to grow.
“And now with Amazon, Disney and ESPN getting behind it…
“You can expect to start seeing this underground opportunity on every webpage Amazon touches…
“You’ll see it across every network Disney owns, including the popular online-streaming service Hulu…
“And I predict it’s all going to kick off with a massive announcement from ESPN as soon as this coming Thursday.
“I suspect over 200 million people could watch it on TV…
“That’s when the mainstream bump will take effect…
“And one tiny company’s stock will absolutely soar.”
I don’t know whether ESPN will really make a new eSports announcement of some kind today… they haven’t yet, but they are certainly involved in eSports and making some big bets on the trend. That’s not brand new, they did a big deal with Activision Blizzard to broadcast the finals of the Overwatch league last year, and it’s not rising to the level of major “real” sports just yet but it is clearly getting the attention of most of the big sports leagues and major media companies. The breakthrough game streamer Ninja even got the cover of ESPN Magazine last fall. No one knows quite what the finances of esports will look like, or of how gaming will evolve, but it’s clearly a trend in society… and that always drives investor interest.
But that doesn’t tell us what the “tiny company” is … more clues?
“WARNING: As Soon as ESPN Makes Their Big Announcement, ALL Main Street Investors Will Be Wise to This Tiny Company…
“Once the cat is out of the bag… it cannot be put back in.
“Which is why it’s so important you get in before next Thursday.”
That’s almost certainly just some “false urgency” designed to get you to make a subscription decision quickly — after all, the enemy of any big-ticket no-refunds newsletter ad campaign is “hold on and let me think about this for a minute.”
We also get some more specific clues, especially about the connection between eSports and actual professional sports leagues:
“The NFL says it is ‘the only North American sports league to commit all its franchises to competitive gaming…’ and has ‘the largest individual tournament prize pool, $700,000, in Madden’s 30-year history.’
“To participate, real investors had to put BIG money into esports…
“Robert Kraft, owner of the New England Patriots — one of the most successful sports franchises in the world — just paid $20 MILLION for an esports team!
“So did Stan Kroenke, owner of the Los Angeles Rams!
“With each NFL team putting up $20 million, you’re looking at almost a billion dollars invested into esports.
“And one tiny company has locked in an exclusive partnership with the creators of the Madden video game…
“So this little-known company is the ONLY company allowed in on the profits in this specific sector…”
The NBA is in a similar position with their NBA 2K game (NBA2K is published by Take Two Interactive (TTWO), by the way… Madden NFL by Electronic Arts (EA)). And apparently this “tiny company is also involved there:
“But the one tiny company I’ve been talking about was even smarter…
“They recently revealed a deal for exclusive rights to the profits in their sector, in the NBA’s new league!”
So what is it that this “tiny company” does? What’s that “sector” of the market that Altucher keeps referencing? More clues…
“And thanks to the patented technology developed by this one tiny company…
“Fans can interact and engage with their favorite pro gamers at a level never possible in any other sport ever before!
“This is a total breakthrough…
“One of my favorite things to invest into is a company with patents.
“Warren Buffett likes “moats” around his investments. And patents are the ultimate moat!
“This tiny company’s patented technology has helped build a new social media alternative that the masses are FLOCKING to….
“… this tiny company has over 175 issued and pending patents on their ideas…”
And apparently their patented product gives players some kind of advantage:
“This Tiny Company Has Unlocked the Secret Stash of Gaming Profits
“You see, this company makes a key piece of technology that is critical to succeeding in the world of competitive gaming.
“Currently, the largest video game prize pool in the world is for the massively popular game Fortnite.
“In case you haven’t heard of it…
“Over 200 million people play Fortnite, making the player community larger than the population of Russia and Japan!
“And the top players in the world will compete for a prize pool of $100 MILLION!
“With stakes that high, professional gamers will want every advantage possible.
“And this little-known company makes key technology that offers the sharpest advantage available in gaming.
“Using this company’s tech, players can react faster AND with greater precision than their opponents…”
And we get a hint about the leadership of the company:
“… this tiny company’s board is LOADED with talent from the largest tech companies in the world.
“Companies like Cisco, Sony, HP and Motorola.”
So… what’s this “tiny company?” This is our old friend Turtle Beach (HEAR), which made a little splash in the world of Gumshoe a few years ago when they bought the wildly overhyped HyperSound business from the over-promoted Parametric Sound… though that was really just a distraction, the company itself is essentially the same today as it has been for a decade, a maker of high-end gaming headsets and similar accessories for video gaming.
To some degree they are catching lightning in a bottle with the Fortnite craze — the “battle royale” format puts a lot of emphasis on communication and speed, and playing with a headset does make a big difference (and make it more fun, since part of the appeal is social), and Fortnite is the first really big mass-market game that demands a headset. They’ve always been popular with hardcore gamers and serious players of more complex games, but Fortnite broadened the market for the headsets, which are not terribly different from any other microphone-equipped headset you might have used and can cost anywhere from $20 to $250.
Turtle Beach does claim that their headsets have patented features and differ from the competition with some video game-specific features (like “superhuman hearing“), and they do have the largest market share of all the aftermarket headphone makers (30-40% market share and growing, and five of the top ten top-selling third party headsets), so it might be that they are building a sustainable advantage — though I have no idea what the upgrade cycle might be for these headsets, or whether they’ll be able to keep growing beyond last year’s surprise Fortnite surge.
So yes, Turtle Beach is the most dominant third party headset provider for gaming… though to imply that this means they’ll get the lion’s share of the profits for this surge in gaming and eSports is just silly. It’s an accessory, and one that is primarily in demand among high-end gamers and the players of “battle royale” games like Fortnite, they’ve been around for years and haven’t seen huge revenue surges from the trend of “more video gaming” in general, it’s really just Fortnite that has driven mass-market headset use.
And, of course, my assumption is that there will be price competition, and the market is just not that big. The total gaming market, including eSports, is arguably somewhere in the $100-150 billion neighborhood, but Turtle Beach, even with a phenomenal growth year thanks to Fortnite’s boost in demand for headsets in 2018, only has annual revenue of about $250 million (and 2018 was the first year of meaningful revenue growth for them since 2014, they didn’t grow revenues from 2015-2017 despite the growth of the video gaming market in those years).
There aren’t many analysts who follow HEAR, but they are a little skeptical about this past year’s Fortnite “lightning in a bottle” event for headsets becoming recurring — Turtle Beach reports in the next couple weeks, so this could change quickly, but the current expectation is that HEAR will finish 2018 with $286 million in revenue and $2.92 per share in earnings… and that 2019 will “reset” the business after that 2018 surge and bring $243 million and $1.69 in earnings. They already preannounced 2018 numbers a few weeks ago, so no big surprises are expected there, but what they say about 2019 will likely shape the stock’s performance in the next month.
So you can probably justify buying the stock here, the huge 2018 did indeed give them a much-needed financial boost and the ability to pay down some expensive debt, so even if that was a one-time surge the shares are arguably reasonably valued at less than 10X next year’s earnings… as long as they don’t provide a more pessimistic forecast for 2019. I would assume that the size of the market is somewhat limited, and, more importantly, that the competition will keep gross margins down, but margins have been solid over the past year in recovering back up to the 35-40% neighborhood, so they have room to decline a bit and still make a good profit (gross margins bottomed out around 20% in 2016).
And yes, Turtle Beach does have lots of marketing deals and “exclusive” arrangements to be the official headset of various eSports leagues and games, and sponsors a bunch of gamers who are popular on Alphabet’s YouTube or Amazon’s Twitch or other widely-viewed platforms, which should be good for the brand… but I don’t have a huge amount of confidence that Turtle Beach branding will let them hold off other accessory makers or experience another surprise demand windfall like they got from Fortnite last year. The good thing, I guess, is that the current valuation doesn’t necessarily assume another windfall — though it does assume that the bottom won’t fall out of the headset market and send revenues back down to 2017 levels.
That’s about all I can tell you about Turtle Beach. They don’t have any strong pure-play competitors, but there are a lot of accessory makers who make competing headsets of similar quality (Logitech, Razer, Steelseries, Kingston, etc), so much will rely on both the size of the market growing and on the power of branding within the market to provide differentiation and protect gross margins among what are fundamentally, at least to my inexpert eye (and ear), very similar products based on similar technologies.
That’s not enough to get me excited, but the stock is priced as if it will plateau at last year’s sales level or a little below, so expectations are muted and the valuation is not crazy. I’d probably have to be a gamer to have any real confidence in their product superiority or brand power, and my Fortnite-playing kids do just fine with cheap headphones, so I may be a little too skeptical of this one… but there is, at least, the underlying trend of popularity in Fortnite and other “battle royale” games that really do require headsets for improved play, and the continuing mass-media presence of competitive video gaming that could bolster brands and keep demand relatively elevated. I won’t try to talk you out of buying Turtle Beach if you believe in the power of their brand, but I will caution you to expect returns that are dramatically lower than James Altucher’s dreamed-of “199,103% explosion.”
And will some announcement come from ESPN today? I have no idea… nor do I really know what it could be, but my best guess would be Disney making some sort of deal to televise a Fortnite tournament, perhaps? Fortnite’ latest “season” did just begin this week, though that doesn’t really mean anything in the big picture (this is Season 8 already, and Fortnite has been out for less than two years), but that’s only a guess… I have no idea whether any new ESPN gaming coverage is about to be announced, and wouldn’t expect any particular televised event to have a meaningful impact on headset demand. The biggest near-term impact on the stock will likely be from HEAR’s earnings announcement, specifically from whatever they say about 2019 (we already know the fourth quarter numbers) — they haven’t specified a date, I don’t think, but did preannounce the basic fourth quarter numbers and say they’ll have the full release in “mid-March” (it was March 6 last year).
So that’s all I’ve got for you today, friends — yes, Turtle Beach has been riding the Fortnite wave as well as just about anyone, but I know now whether that wave crashes on the beach (ha!) or keeps rolling. It’s your money, so you can make your call on that… let us know what you think with a comment below.
Disclosure: I own shares of Disney, Alphabet, and Amazon, mentioned above. I am not invested in any of the other stocks mentioned, and will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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