One of the more intriguing companies to report earnings this week is the restaurant and entertainment franchise Dave & Busters (NYSE:PLAY). At the onset of the pandemic, Dave & Buster’s was in the same position as casinos. You have a business model that goes against the concept of social distancing. Then you add a focus on customers playing video games that have high-touch (and hard to keep clean) surfaces. And you throw in a heavy reliance on live sports as a draw to bring customers in.
It’s not hard to see why shares of PLAY stock fell nearly 90% at the onset of the pandemic. But Dave & Buster’s has seen a revival of sorts. The stock is up off its low of $4.87 and is now trading at just over $18 (at the time of this writing).
With all that as a background, it’s time to get real about where the company is, and where it’s going in the short term. Investors will be looking to the earnings report to get a bit more clarity on where the business stands.
However, one thing seems certain. Dave & Buster’s is still in the early stages of whatever a comeback is going to look like. Without a vaccine for the novel coronavirus, it’s unreasonable to expect the company to return to anything approaching pre-pandemic revenue levels. And while I applaud the company for cost-cutting measures, ultimately playing defense only gets you so far.
And it looks like the stock has hit that ceiling.
Is PLAY stock priced fairly?
Prior to the pandemic, PLAY stock was trading around $45. So if you just look at its stock price, investors might think that Dave & Buster’s is a reasonable investment trading at less than half that price. But in May 2019, PLAY stock was trading near $60.
That means the stock price had dropped about 25% prior to the pandemic. And this was despite the fact that the company’s revenue in fiscal year 2020 (that ended in April) was about 7% higher than the prior year. Whenever the stock price is falling in the face of increasing revenue, it’s a concern. Perhaps analysts were expecting more from the company. They’re certainly not seeing that now.
In any event, revenue is unlikely to be anywhere close to last year’s level. The revenue forecast for the current quarter is just over 50% less than the prior quarter. And although the whisper number suggests that Dave & Buster’s may surprise on earnings, they will still be unprofitable.
Investors should pay close attention to understand what effect, if any, the return of live sports has had on the franchise. This will be particularly important with the National Football League returning. Dave & Buster’s was a popular gameday hangout. Perhaps the restaurant side of the business will get a boost. But that will not be reflected until next quarter.
Robinhood Traders Like PLAY Stock
Dave & Buster’s stock is among the most popular stocks under $25 on Robinhood. I don’t have any issue with Robinhood investors in general. But it’s not a big secret that many would-be day traders have had some time on their hands during the pandemic. And they’ve been looking at stocks like PLAY stock as an opportunity to make a quick buck or two.
If you’ve been one of those traders fortunate enough to ride PLAY stock to a tidy profit, good for you. But just remember that, at some point, fundamentals matter. And the fundamentals for Dave & Buster’s will remain messy for quite some time.
The bottom line on PLAY Stock
I enjoy having the opportunity to take a break from reality and play. And with that I’ve always understood the appeal of a chain like Dave & Buster’s. I’m optimistic that there will be a case for Dave & Buster’s in the future. There has seemed to be some interest in Top Golf, Drive Shack, and other similar business models.
However, I’m not at all optimistic that day is today, tomorrow, or anytime in the next six months. Call me a Debbie Downer. Fine. I call myself a realist and you should too. In the best-case scenario, PLAY stock is being pushed forward by traders who truly believe the company is going to report numbers that reflect a business that is gradually opening.
But the reality is that PLAY stock is likely a game. Traders are seeing an opportunity to get in and out of trades with a stock that was beaten down (perhaps too much) at the onset of the novel coronavirus. That’s not a game I want to play. Especially when the stock’s current price seems to factor in all the best news.
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