Bally’s stock price has taken a beating over the past six months, shedding 38.7% of its value and falling to $11.34 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Bally's, or should you be careful about including it in 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?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why you should be careful with BALY and a 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 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

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).

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. Unfortunately, Bally’s ROIC has decreased 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 $113.5 million of cash over the last year, and its $5.55 billion of debt exceeds the $264.7 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 decline, the stock trades at 2.1× forward EV-to-EBITDA (or $11.34 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.

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