Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) Soars 30% But It's A Story Of Risk Vs Reward
Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.
Even after such a large jump in price, it's still not a stretch to say that Dave & Buster's Entertainment's price-to-earnings (or "P/E") ratio of 15.4x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Dave & Buster's Entertainment certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Check out our latest analysis for Dave & Buster's Entertainment
Want the full picture on analyst estimates for the company? Then our free report on Dave & Buster's Entertainment will help you uncover what's on the horizon.
Is There Some Growth For Dave & Buster's Entertainment?
In order to justify its P/E ratio, Dave & Buster's Entertainment would need to produce growth that's similar to the market.
Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.
With this information, we find it interesting that Dave & Buster's Entertainment is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.
The Key Takeaway
Its shares have lifted substantially and now Dave & Buster's Entertainment's P/E is also back up to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Dave & Buster's Entertainment currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Dave & Buster's Entertainment that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
