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Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Shares Could Be 46% Below Their Intrinsic Value Estimate

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Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Shares Could Be 46% Below Their Intrinsic Value Estimate

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Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Shares Could Be 46% Below Their Intrinsic Value Estimate
Dave Buster S Entertainment Inc Trade Ideas Nasdaq Play Tradingview

How far is Dave & Buster's Entertainment, Inc. (NASDAQ: PLAY ) from its intrinsic value? Using the most recent financial data, we assess whether a stock is fair value by taking the expected future cash flows and discounting them to their present value. For this, we use the Discounted Cash Flow (DCF) model. Don't be intimidated by the jargon, the math behind it is pretty simple.

Generally, we think of the value of a company as the present value of all cash received in the future. However, DCF is only one of many evaluation measures and is not without its drawbacks. If you still have tough questions about this type of valuation, check out Simply Wall St.

Check out our latest Dave & Buster's Entertainment review.

Is entertainment at Dave & Buster's overrated?

We will use the two-stage DCF model, which, as the name suggests, covers two stages of growth. The first phase is usually a period of increased growth, which gradually decreases to the final value recorded in the second period of "permanent growth". First, we need to calculate the cash flows for the next ten years. We use analyst estimates when available, but when they are not available, we extrapolate previous free cash flow (FCF) based on the most recent estimate or reported value. We assume that companies that decrease free cash flow will reduce their rate of contraction and that growth will slow during this period and that companies that increase cash flow. We do this to reflect that growth slows down more slowly in early years than in later years.

We usually assume that the dollar is worth more than it will be in the future, so we have to discount the amount of these future cash flows to get an estimate of their present value;

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10-year free cash flow (FCF) forecast

in 2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

FCF Leverage ($, mln)

161.2 million dollars

180.6 million dollars

$246.0 million

$313.0 million

$316.0 million

319.8 million dollars

324.3 million dollars

329.4 million dollars

$335.0 million

340.9 million dollars

Source of growth rate estimates

Analyst x3

Analyst x3

Analyst x1:

Analyst x1:

Analyst x1:

about 1.2%

Rating 1.42%

Rating 1.58%

Rating 1.69%

Rating 1.76%

Present value ($, mln) with a discount of 9.7%.

$147

$150

$186

$216

$199

$184

$170

$157

$146

$135

("East" = Free Cash Flow Growth Rate Estimated by Simply Wall St) 10-Year Present Cash Flow Value (PVCF) = $1.7 billion.

the story continues

Now we need to calculate the terminal value, which takes into account all future cash flows after these ten years. The Gordon Growth Formula is used to calculate the final value at a future annual growth rate equal to the average 5-year yield of 1.9% on 10-year government bonds. We discount terminal cash flows based on the current cost of capital at a rate of 9.7%.

Final value (TV) = FCF2032 × (1 + g) ÷ (r – g) = $341 million × (1 + 1.9%) ÷ (9.7% – 1.9%) = 4.5 points.

Present Value Final Value (PVTV) = TV / (1 + r) 10 = $4.5 b ÷ (1 + 9.7%) 10 = $1.8

The total cost or cost of capital is the sum of the present value of future cash flows, in this case $3.5 billion. To get the intrinsic value of a stock, we divide it by the number of shares outstanding. Compared to its current share price of $38.9, the company is a pretty good value at a 46% discount to its current share price. Remember, though, that this is only a rough estimate and, like any complex formula, garbage in, garbage out.

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important assumptions

Now the most important inputs to discounted cash flows are the discount rate and, of course, the actual cash flows. You don't have to agree with these rumours, I encourage you to recalculate and experiment with them. Additionally, DCF does not take into account potential industry cyclicality or the company's future capital needs, and therefore does not provide a complete picture of a company's potential performance. Since we are considering Dave & Buster's Entertainment as a potential shareholder, the discount rate is the cost of capital, not the cost of capital (or the weighted average cost of capital, WACC), which includes debt. We use 9.7% in this calculation, which is based on a leveraged beta of 1.823. Beta is a measure of a stock's volatility relative to the overall market. We use our beta from the global peer industry average beta of 0.8 to 2.0, which is a reasonable range for a stable business.

Continue:

While the DCF calculation is important, it shouldn't be the only metric you look at when researching a company. A reliable estimate is not possible with the DCF model. Instead, it is better to use the DCF model to test some assumptions and theories to see if they lead to an underestimation or overestimation of the company. For example, a small adjustment in net income growth rates can significantly change the overall result. Why is the intrinsic value higher than the current stock price? For Dave & Buster's Entertainment, we've rounded up three additional items for you to explore:

  • Risks: Before investing in the company, you should be aware of the first Dave & Buster's Entertainment caveat that we have identified.

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  • future earnings. What is PLAY's growth rate compared to competitors and the market? Explore analyst consensus data for the coming years by interacting with our free analyst growth expectations chart.

  • Other reputable businesses. Low debt, high return on equity and good past performance are essential to a strong business. Why not browse our interactive list of stocks with strong business fundamentals to see if there are any other companies you might not want to consider?

  • The PS Simply Wall St app provides a daily cash discount estimate for each NASDAQGS stock. If you want to find more stock calculations, search here.

    Do you have a comment about this article? Worried about content? Contact us now. Alternatively, email the editor at (at) simplewallst.com.

    This "Just Wall Street" article is general. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell shares and does not take into account your goals or financial situation. Our goal is to provide a long-term analysis based on fundamental data. Please note that our analysis may not take into account recent advertisements or quality materials from price-based companies. Simply Wall St has no positions in listed stocks.

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