The past six months have been a windfall for Bally’s shareholders. The company’s stock price has jumped 43.7%, hitting $14.00 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Bally's, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Bally's Will Underperform?
Despite the momentum, we’re passing on Bally's for now. Here are three reasons why BALY doesn’t excite us, plus one stock we’d rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Bally’s recent performance shows its demand has slowed as its annualized revenue growth of 6.9% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. Note that COVID hurt Bally’s business in 2020 and part of 2021, and it bounced back in a big way thereafter. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Unfortunately, Bally’s ROIC averaged 4.9 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Bally's burned through $396.5 million of cash over the last year, and its $6.83 billion of debt exceeds the $653.4 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Bally’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Bally's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Bally's, we’ll be cheering from the sidelines. Following the recent rally, the stock trades at 13.6× forward EV-to-EBITDA (or $14.00 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Bally's
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