Parametric Sound at Front Lines of New Console Cycle
We are initiating coverage of Parametric Sound (NASDAQ:HEAR) with an OUTPERFORM rating and a 12-month price target of $15. We arrive at our $15 price target by a sum-of-the-parts valuation: applying an 12x multiple to our 2015 Turtle Beach segment EBITDA estimate of $45 million and attributing $100 million of value for the option upside of the still nascent Parametric Sound HyperSound segment. Our multiple is higher than the market multiple for Parametric’s peers, which we believe is warranted, given the company’s superior growth prospects as we enter a new console cycle.
Turtle Beach has a market-leading position in the U.S. gaming headsets market with a roughly 53 percent dollar share. As we head into a new console cycle, Turtle Beach should benefit as installed base of next-generation and current generation consoles grows over the next several years. We expect historical console attach rates for headsets to grow slightly, and expect Turtle Beach to gain market share by expanding further into Europe and other international console markets.
Multiplayer gameplay is gaining in popularity, helping drive demand for the type of headset communication devices sold by Turtle Beach.
While two-way headsets range in price from under $20 to over $400, we think that sound quality is increasingly important to many gamers, as the competitive nature of the games involves a desire to be able to detect an approaching enemy. We expect more multiplayer-only games to be released in the coming years as high-speed Internet connectivity becomes ubiquitous in developed markets.
Parametric intends to leverage Turtle Beach’s infrastructure to help commercialize the HyperSound technology within several end markets.
During FY:14 the company intends to focus on commer cialization of the retail and kiosk product, while also developing the healthcare end-market opportunity, which achieved a milestone of FDA approval in February ofthis year.
Turtle Beach’s operating results are more volatile and difficult to predict during platform transitions. Consumers tend to reduce purchases of game console accessories for the current-gen platforms in anticipation of new consoles becoming available. Sales of headsets sold by Turtle Beach tend to slow or decline until the new platforms are introduced and achieve consumer acceptance.
Michael Pachter is an analyst at Wedbush Securities.