Stock Analysis

Does This Valuation Of Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) Imply Investors Are Overpaying?

NasdaqGS:PLAY
Source: Shutterstock

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Dave & Buster's Entertainment fair value estimate is US$28.10
  • Current share price of US$34.70 suggests Dave & Buster's Entertainment is potentially 23% overvalued
  • The US$51.11 analyst price target for PLAY is 82% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Dave & Buster's Entertainment

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$133.3m US$145.2m US$137.8m US$133.8m US$131.9m US$131.5m US$132.0m US$133.3m US$135.0m US$137.1m
Growth Rate Estimate Source Analyst x3 Analyst x4 Est @ -5.08% Est @ -2.91% Est @ -1.39% Est @ -0.33% Est @ 0.41% Est @ 0.93% Est @ 1.30% Est @ 1.55%
Present Value ($, Millions) Discounted @ 12% US$119 US$115 US$97.7 US$84.6 US$74.4 US$66.1 US$59.2 US$53.3 US$48.1 US$43.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$761m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 12%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$137m× (1 + 2.2%) ÷ (12%– 2.2%) = US$1.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.4b÷ ( 1 + 12%)10= US$445m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$1.2b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$34.7, the company appears slightly overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
NasdaqGS:PLAY Discounted Cash Flow September 9th 2023

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Dave & Buster's Entertainment as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 12%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Dave & Buster's Entertainment

Strength
  • Debt is well covered by cash flow.
Weakness
  • Earnings growth over the past year underperformed the Hospitality industry.
  • Interest payments on debt are not well covered.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Annual revenue is forecast to grow slower than the American market.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Dave & Buster's Entertainment, there are three relevant aspects you should further examine:

  1. Risks: Case in point, we've spotted 1 warning sign for Dave & Buster's Entertainment you should be aware of.
  2. Future Earnings: How does PLAY's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether Dave & Buster's Entertainment is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.