Dave & Buster’s stock price has taken a beating over the past six months, shedding 28.8% of its value and falling to $12.55 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Dave & Buster's, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Dave & Buster's Will Underperform?
Even though the stock has become cheaper, we're swiping left on Dave & Buster's for now. Here are three reasons you should be careful with PLAY and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
In addition to reported revenue, same-store sales are a useful data point for analyzing Consumer Discretionary - Leisure Facilities companies. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Dave & Buster’s underlying demand characteristics.
Over the last two years, Dave & Buster’s same-store sales averaged 6% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Dave & Buster's might have to close some locations or change its strategy and pricing, which can disrupt operations.
2. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Dave & Buster’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Dave & Buster's burned through $100.6 million of cash over the last year, and its $3.08 billion of debt exceeds the $16.6 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Dave & Buster’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Dave & Buster's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Dave & Buster's, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 8.2× forward EV-to-EBITDA (or $12.55 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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