Bally's has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.7%. The stock now trades at $13.93, marking a 27.5% gain. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Bally's, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Bally's Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons we avoid BALY, plus one stock we’d rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. 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
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
On average, Bally’s ROIC decreased by 4.9 percentage points annually 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
Bally's doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 13.6× forward EV-to-EBITDA (or $13.93 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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