With the fading of restrictive COVID-19 policies, entertainment centers such as specialty restaurant Dave & Buster’s Entertainment (NASDAQ:PLAY) suddenly saw their viability rise again. Unfortunately for PLAY stock, that narrative came crashing down recently after the underlying enterprise revealed its latest earnings results. It wasn’t pretty. However, Dave & Busters has a growing market on its side (more on that later).
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At first glance, though, investors seemingly have every right to abandon ship. After all, social normalization represented the critical lifeline that Dave & Buster’s and its ilk needed to survive. The fact that the company missed expectations for key financial and operational metrics implied strongly that the consumer economy wasn’t firing on all cylinders.
Nevertheless, it’s not time to give up on the entertainment center just yet. With a new wrinkle in the return-to-office mandates that have been increasingly popular among business leaders, Dave & Buster’s may have seen its total addressable market expand. Therefore, the entity may actually be a fundamentally discounted opportunity, especially when considering its valuation. As such, I am bullish on PLAY stock.
PLAY Stock Crumbled Following a Poor Q1
Before getting into the good stuff, we must talk about the bad. In the middle of last week, Dave & Buster’s disclosed its results for the first quarter of Fiscal 2024. Unfortunately, the print was disappointing, with the company suffering a big impact from higher labor and marketing costs, per TipRanks reporter Radhika Saraogi.
“The company reported adjusted earnings of $1.12 per share, which missed the consensus estimate of $1.73. Also, it compared unfavorably with EPS of $1.52 in the year-ago quarter. Moreover, Dave and Buster’s revenue decreased 1.5% year-over-year to $588.1 million and missed the consensus estimate of $615.88 million,” wrote Saraogi.
In addition, the reporter mentioned that comparable store sales slipped 5.6% on a year-over-year basis. Management blamed a difficult macroeconomic environment for the performance, which makes sense. Inflation and elevated borrowing costs are crimping consumer sentiment for many income levels.
Now, the silver lining is that Dave & Buster’s is opening three new stores under its namesake brand. Plus, it’s opening another location under its Main Event unit. Throughout Fiscal 2024, management aims to open about 15 new stores across both brands, seeking to expand its customer base.
This initiative may have just encountered a tailwind. And that may mean investors shouldn’t give up on PLAY stock just yet.
Get Back to Work!
Let’s think about what made Dave & Buster’s special prior to the COVID-19 crisis. Back then, remote work was only available for the extremely privileged or connected. Most workers – whether white-collar, blue, or somewhere in the middle – had to endure the grind. Entertainment centers and specialty restaurants allowed workers to blow off some steam and let loose during happy hour.
However, the remote work paradigm greatly disrupted this business model. Without the daily nine-to-five grind, there was no steam to let off. So, the incentivization that fueled PLAY stock faded rapidly. That might change soon enough.
As TipRanks contributor Steve Anderson pointed out, Wells Fargo (NYSE:WFC) did something very interesting. The big bank “fired just over a dozen people who they claimed were ‘faking work,’” as Anderson put it.
To be blunt, the situation isn’t surprising. Well before the pandemic, the average worker wasted more than two hours a day. Without physical accountability, this metric will only worsen, not improve – come on, let’s not be silly here.
The most important point here is that bank employees – you know, those folks who handle sensitive financial information as their main job description – should operate under a higher ethical standard. Apparently, they don’t. And that’s probably going to make business leaders of other industries rightfully suspicious about their own accountability protocols.
In other words, that means reduced remote-working privileges and more time in the office, which contributes to stress and the need to let off some steam. Ultimately, the road seems to be leaning toward Dave & Buster’s, which would be good for PLAY stock.
A Compelling Valuation Story
What makes Dave & Buster’s compelling is that the bullish argument doesn’t just center on a narrative. Rather, a compelling valuation story can be made as well.
Right now, the market prices PLAY stock at a trailing-year revenue multiple of 0.7x. However, the average sales multiple for the restaurant industry comes in at 0.98x. Granted, it’s not a perfect comparison because Dave & Buster’s stores also include video game arcades and other entertainment platforms, but that gives us a rough baseline to work with.
In fairness, analysts only anticipate the company’s sales to rise to $2.25 billion for the current fiscal year. That would be up only 2.2% from the prior year, which clouds the bullish argument. However, analysts may need to reassess the situation.
Admittedly, Q1 was terrible. Yet, with major companies likely to reexamine their work-from-home policies, Dave & Buster’s just needs some patience. If more normalization occurs in the workforce, PLAY stock may rise due to the expanded addressable market.
Is Dave & Busters Stock a Buy, According to Analysts?
Turning to Wall Street, PLAY stock has a Moderate Buy consensus rating based on four Buys, three Holds, and zero Sell ratings. The average PLAY stock price target is $66.50, implying 59.9% upside potential.
The Takeaway: An Expanded Market May be Around the Corner
Based purely on Dave & Buster’s most recent earnings report, investors have every reason to abandon ship. However, it’s also important to realize that its underlying addressable market may expand. The concept of remote work just received a major credibility attack, which could translate to reduced privileges. This framework could yield more worker bees looking to let off some steam. That’s an underappreciated catalyst for PLAY stock.
