Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) shareholders have had their patience rewarded with a 54% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.
After such a large jump in price, Dave & Buster's Entertainment's price-to-earnings (or "P/E") ratio of 28.4x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Dave & Buster's Entertainment hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for Dave & Buster's Entertainment
How Is Dave & Buster's Entertainment's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Dave & Buster's Entertainment's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. This means it has also seen a slide in earnings over the longer-term as EPS is down 65% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 39% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 10% each year, which is noticeably less attractive.
With this information, we can see why Dave & Buster's Entertainment is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From Dave & Buster's Entertainment's P/E?
Shares in Dave & Buster's Entertainment have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Dave & Buster's Entertainment maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 4 warning signs for Dave & Buster's Entertainment (1 makes us a bit uncomfortable!) that you need to be mindful of.
If you're unsure about the strength of Dave & Buster's Entertainment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.