Calculating the Intrinsic Value of Dave & Buster’s Entertainment, Inc. (NASDAQ: PLAY )

key insights

• Dave & Buster’s Entertainment estimated fair value based on two-stage equity free cash flow of $43.37
• At $41.26, Dave & Buster’s Entertainment appears to be trading near its estimated fair value
• PLAY has an analyst price target of $52.88 22% higher than our estimated fair value

Today we will briefly describe the valuation methodology used to assess the attractiveness of Dave & Buster’s Entertainment, Inc. (Nasdaq: Play) as an investment opportunity by forecasting its future cash flows and then discounting them to today’s value. This time we will use a discounted cash flow (DCF) model. Don’t be put off by the jargon, the math behind it is actually pretty simple.

Companies can be valued in a variety of ways, so we would like to point out that DCF is not suitable for all situations.If you want to learn more about discounted cash flows, you can find them at Simply Wall St Analysis Model.

Check out our latest analysis for Dave & Buster’s Entertainment

Calculate step by step

We will use a two-stage DCF model, which, as the name suggests, considers two growth stages. The first phase is usually a period of higher growth, with the final value captured in the second “steady growth” period leveling off. First, we need to estimate the cash flows for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with shrinking free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.

DCF is the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-Year Free Cash Flow (FCF) Estimation

(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = $1.2

After calculating the present value of future cash flows for the first 10 years, we need to calculate the terminal value, which covers all future cash flows after the first period. The Gordon Growth Formula is used to calculate the future annual growth rate equal to the terminal value of the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today’s value at a cost of equity of 13%.

Future Value (TV)= free cash flow₂₀₃₂ × (1 + g) ÷ (r – g) = US$298m× (1 + 2.1%) ÷ (13%– 2.1%) = US$2.9b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= $2.9 b÷ ( 1 + 13%)¹⁰= $872 million

The total value or equity value is the sum of the present value of the future cash flows, in this case US$2.1b. To get intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of $41.3, the company’s fair value represents a 4.9% discount to the current share price. However, estimates are imprecise tools, like telescopes – shift a few degrees and end up in different galaxies. Please keep this in mind.

important assumptions

Now the most important input to discounted cash flows is the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I suggest you recalculate it yourself and try it out. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we are looking at Dave & Buster’s Entertainment as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for debt. In this calculation, we used 13%, which is based on a leveraged beta of 1.783. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.

Dave & Buster’s Entertainment SWOT Analysis

continue:

While important, DCF calculations ideally won’t be the only analysis you review for a company. It is not possible to obtain foolproof valuations using the DCF model. Rather, it should be viewed as a guide to “what assumptions need to hold for this stock to be undervalued/overvalued?” For example, changes in a company’s cost of equity or the risk-free rate can have a significant impact on valuations. For Dave & Buster’s Entertainment, we’ve compiled three more items you should be evaluating:

1. risk: For example, we found 1 warning sign from Dave & Buster’s Entertainment Factors to consider before investing here.
2. manage: Have insiders been pumping up their shares to capitalize on what the market thinks about PLAY’s future prospects?look at our Management and Board Analysis Insights into CEO compensation and governance factors.
3. Other entity business: Low debt, high return on equity and good track record are the foundation of a strong business.why not explore Our interactive stock list with solid business fundamentals Check out other companies you might not have considered!

postscript. Simply Wall St updates the DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, just search here.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.