Turtle Beach Corp: Short Squeeze Candidate?

Small cap gaming headset maker Turtle Beach Corp (NASDAQ: HEAR) has the dubious distinction of being the most shorted stock on the Nasdaq with short interest of 62.25% according to HighShortInterest.com data. Turtle Beach Corp is still considered a leading gaming accessory brand that offers a wide selection of gaming headsets for professional esports athlete, hardcore gamers, casual players and those just starting out. According to the Company:

…Turtle Beach has the gaming headset to help you truly master your skills. Innovative and advanced technology, amazing high-quality gaming audio, crystal-clear communication, lightweight and comfortable designs, and ease-of-use are just a few features that make Turtle Beach a fan-favorite brand for gamers the world over. Designed for Xbox, PlayStation®, and Nintendo consoles as well as for PC, Mac®, and mobile/tablet devices, owning a Turtle Beach gaming headset gives you the competitive advantage. Hear Everything. Defeat Everyone.

Ironically, the Company was a highflyer not that long ago and shares had traded as high as the $90 level:

However, shares then lost most of their value only to takeoff again last May, peak in August and then fall back down again to hover around the $15 level since mid-November:

The reason for the surge was due to the release of a couple of "battle royale" style games (Fortnite and Player Unknown's Battlegrounds) where players need to communicate with their teammates and Turtle Beach Corp happens to make headsets equipped with microphones to allow for this. Sales ended up surging in Q1 and Q2 (taking shares up with them) with the windfall being used to pay down debt plus the Company regained compliance with Nasdaq listing rules via a 1-for-4 reverse stock split in April.

Sounds great, right? The problem and what the shorts are betting on is that "battle royale" style games will end up being just another fad like Beanie Babies, hula hoops etc. Not to mention, Turtle Beach Corp is not exactly the only headset makers out there and you can bet that knockoffs are now readily available for a much lower price. There's also no indication just yet when Q4 earning (the all important Christmas holiday period) will be out albeit an excellent investor presentation was released in mid-January which noted that the Company enjoys brand loyalty from hardcore gamers.

DA Davidson analyst Tom Forte recently wrote in a research note that a holiday sales report from retailer GameStop Corp (NYSE: GME) which said its holiday same-store sales were up on the strength of a 28.7% increase in the sale of video game accessories should bode well for Turtle Beach Corp ("Given GameStop is a top-five retailer for Turtle Beach, we believe this is a positive indication for HEAR"). Forte also added that strong headset sales should be seen as good news for Logitech International SA (NASDAQ: LOGI).

For the above reasons, its probably not a good idea to be shorting shares of Turtle Beach Corp right now and a case could be made for some short term purchases of shares. On the other hand and while shares may now be more fairly valued than several months ago, I would not be buying shares for the longhaul as "battle royale" style games can just as quickly go out of fashion.