The past six months have been a windfall for Bally’s shareholders. The company’s stock price has jumped 52.4%, hitting $17.68 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Bally's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.We’re glad investors have benefited from the price increase, but we're swiping left on Bally's for now. Here are three reasons why there are better opportunities than BALY and a stock we'd rather own.
Why Do We Think Bally's Will Underperform?
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE:BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
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 history shows its demand slowed significantly as its annualized revenue growth of 5.6% over the last two years is well below its five-year trend. 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
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, Bally’s ROIC has decreased significantly 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 $54.58 million of cash over the last year, and its $5.04 billion of debt exceeds the $280.5 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 see the value of companies helping consumers, but in the case of Bally's, we’re out. Following the recent surge, the stock trades at 1.6× forward EV-to-EBITDA (or $17.68 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at Costco, one of Charlie Munger’s all-time favorite businesses.
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