Shares of Turtle Beach (HEAR 0.28%) plunged 13% on Nov. 7 after the gaming headset maker reported its third quarter numbers. The drop was initially surprising since Turtle Beach easily beat analyst expectations, but it was likely caused by two things.

First, Turtle Beach's stock already generated multi-bagger returns this year and remains up nearly 930% after its post-earnings dip, so some profit-taking was expected. Second, Oppenheimer analyst Andrew Uerkwitz cut his price target from $35 to $24, warning that Turtle Beach's sales would inevitably decelerate after its "extraordinary growth" in 2018.

A gamer plays a PC game.

Image source: Getty Images.

So does Turtle Beach's post-earnings drop represent a buying opportunity? Let's examine four reasons to buy and four reasons to sell this volatile stock.

4 reasons to buy Turtle Beach

Turtle Beach's growth is explosive. Its revenue rose 107% annually to $74 million during the third quarter, beating estimates by about $1 million. It generated net income of $14.7 million, or $0.91 per share, clearing estimates by $0.15 and marking a big improvement from its loss of $0.5 million, or $0.04 per share, a year earlier.

Turtle Beach's margins are expanding. Its gross margin rose 610 basis points annually to 41% during the quarter thanks to a favorable product and customer mix, higher sales volumes, lower freight costs, and fewer promotions. Its operating margin also surged from 5.2% to 22.2% during that period.

Turtle Beach's market share is growing. Its share of the console gaming headset market in the US and Canada hit 45.2% in the first nine months of 2018, compared to 40.3% a year earlier, according to NPD. It maintains its lead with a first mover's advantage in the wireless console headset market, which coincided with the rise of "battle royale" titles like Fortnite and PUBG last year, and a wide range of headsets at multiple price tiers.

Its stock looks cheap relative to its growth. Wall Street expects Turtle Beach to report 77% sales growth this year and a full-year profit of $2.42 per share, compared to a loss of $0.28 per share last year. Based on that forecast, Turtle Beach trades at roughly 1 times this year's sales and 8 times this year's earnings -- which seem like bargain bin valuations for a growth stock.

Epic Games' Fortnite.

Fortnite. Image source: Epic Games.

4 reasons to sell Turtle Beach

Turtle Beach's growth is decelerating. Its headset sales are heavily dependent on the battle royale boom, and are expected to drop sharply as the market becomes saturated. The company expects its revenue to grow just 18% annually during the fourth quarter, and for its EPS to fall 11%. Looking further ahead, analysts expect its revenue and earnings to decline 5% and 21%, respectively, next year.

Its stock is getting more expensive. Based on those estimates, Turtle Beach's stock trades at 12 times forward earnings. That multiple is still low, but it could continue rising as its earnings growth decelerates.

It faces plenty of hungry rivals. Turtle Beach got lucky when it launched the first wireless gaming headset for the Xbox One last year, but plenty of competitors -- including Logitech's (LOGI 0.10%) Astro Gaming, LucidSound, and Razer -- subsequently entered the market. In Wired's recent ranking of the top ten wireless gaming headsets, Turtle Beach claimed two prestigious spots ("Best for PS4" and "Best for Xbox One"), but Astro's headsets were named as the runner ups on both platforms.

It lacks a sustainable upgrade cycle. Hardware makers often go through big boom and bust cycles when customers have no reason to upgrade their existing devices. That's what happened to action camera maker GoPro (GPRO 0.89%), and Turtle Beach faces the same problem -- it's attracting plenty of customers today, but those customers probably won't upgrade their devices annually for the company to generate sustainable growth. Therefore, Turtle Beach's growth in 2018 reminds me a lot of GoPro's growth in 2014 -- which ultimately hit a brick wall and burned plenty of investors.

The verdict: Take some profits

Turtle Beach investors should take some money off the table after the stock's monstrous rally this year. I'm not saying the stock will crash, but the company faces decelerating growth and tougher competition as it rides the coattails of a single hot gaming genre -- which doesn't seem like a sustainable long-term strategy.