Over the last six months, Bally’s shares have sunk to $12.98, producing a disappointing 15.3% loss - a stark contrast to the S&P 500’s 23.2% gain. This was partly driven by its softer quarterly results and 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? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Bally's Will Underperform?
Even though the stock has become cheaper, we're cautious about Bally's. Here are three reasons you should be careful with BALY and a 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 significantly as its annualized revenue growth of 2.9% over the last two years was 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 like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Bally’s ROIC has unfortunately decreased significantly. 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 $178.8 million of cash over the last year, and its $5.70 billion of debt exceeds the $240.9 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. After the recent drawdown, the stock trades at 1.6× forward EV-to-EBITDA (or $12.98 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Bally's
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