Dave & Buster's has gotten torched over the last six months - since October 2024, its stock price has dropped 43% to $19.71 per share. This was partly due to 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.

Even though the stock has become cheaper, we're swiping left on Dave & Buster's for now. Here are three reasons why PLAY doesn't excite us and a stock we'd rather own.

Why Do We Think Dave & Buster's Will Underperform?

Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ:PLAY) operates a chain of arcades providing immersive entertainment experiences.

1. Shrinking Same-Store Sales Indicate Waning Demand

We can better understand Leisure Facilities companies by analyzing their same-store sales. 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 3.7% 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. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the last two years, Dave & Buster’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.2%, meaning it lit $4.24 of cash on fire for every $100 in revenue.Dave & Buster's Trailing 12-Month Free Cash Flow Margin

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 $217.9 million of cash over the last year, and its $3.06 billion of debt exceeds the $6.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

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Dave & Buster's Net Debt Position

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. After the recent drawdown, the stock trades at 7.2× forward price-to-earnings (or $19.71 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Like More Than Dave & Buster's

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