Is Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) Worth US$60.3 Based On Its Intrinsic Value?
Key Insights
Dave & Buster's Entertainment's estimated fair value is US$48.97 based on 2 Stage Free Cash Flow to Equity
Dave & Buster's Entertainment's US$60.30 share price signals that it might be 23% overvalued
Our fair value estimate is 17% lower than Dave & Buster's Entertainment's analyst price target of US$59.25
In this article we are going to estimate the intrinsic value of Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Dave & Buster's Entertainment
Is Dave & Buster's Entertainment Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$148.5m | US$182.9m | US$180.9m | US$180.7m | US$181.8m | US$183.8m | US$186.5m | US$189.7m | US$193.3m | US$197.2m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ -1.13% | Est @ -0.10% | Est @ 0.61% | Est @ 1.12% | Est @ 1.47% | Est @ 1.72% | Est @ 1.89% | Est @ 2.01% |
Present Value ($, Millions) Discounted @ 11% | US$134 | US$150 | US$134 | US$121 | US$110 | US$101 | US$92.3 | US$84.9 | US$78.2 | US$72.2 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.1b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 11%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$197m× (1 + 2.3%) ÷ (11%– 2.3%) = US$2.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.4b÷ ( 1 + 11%)10= US$891m
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$2.0b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$60.3, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 11%, which is based on a levered beta of 1.801. 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
Earnings growth over the past year exceeded the industry.
Debt is well covered by cash flow.
Weakness
Earnings growth over the past year is below its 5-year average.
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.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Dave & Buster's Entertainment, we've compiled three important elements you should explore:
Risks: For example, we've discovered 1 warning sign for Dave & Buster's Entertainment that you should be aware of before investing here.
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.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
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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.
