Markets

Why Dave & Buster's Stock Is Rebounding Today After Crashing Yesterday

What happened

Shares of Dave & Buster's Entertainment (NASDAQ: PLAY) are rebounding today after a sharp sell-off yesterday when investors were fleeing, afraid of a potential bankruptcy. But today, confidence was restored after a couple of analysts issued reports suggesting investors should buy this beaten-down stock.

The stock has indeed been battered -- it's down around 65% from its 2020 highs. But today, it's taking back lost ground. As of 10:30 a.m. EDT, Dave and Buster's stock was up 12%.

PLAY Chart

PLAY data by YCharts.

So what

The Wall Street Journal is a major publication that can influence investor opinions, and yesterday, it used the word "bankruptcy" when talking about Dave & Buster's. In short, the company's high debt load means its lenders need to be lenient during this time in order for Dave & Buster's to make it through. The stock sold off big time as a result.

But a pair of analysts think Dave & Buster's is now a buy. An analyst from Raymond James and another from Stifel each upgraded the stock. Both placed a $20 price target on the stock, implying 42% upside from yesterday's close.

Stifel analyst Chris O'Cull took aim at investors' fears, noting the risk of bankruptcy isn't new. Specifically, The Wall Street Journal article referenced the "Going Concern" section of Dave & Buster's latest 10-Q filing (a quarterly filing with the Securities and Exchange Commission). A Going Concern section is only included when there's a reasonable danger of bankruptcy, and that's the case here.

Here's what it says in one part: "Failure to obtain additional waivers would have a material adverse effect on the Company's liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code to implement a restructuring plan."

To O'Cull's point, this is exactly what the previous 10-Q filing said, and that was submitted in June. Therefore, these analysts believe investors are overreacting to the old news of a potential bankruptcy. 

A businessman draws an upward arrow over a stock chart displayed on a transparent touchscreen.

Image source: Getty Images.

Now what

Dave & Buster's has had a rough 2020 with almost no revenue coming in. Its cash burn is slowing down now that some locations have reopened, but sales are still way down.

In the end, the company may be able to stage a full recovery, which might make the stock a good value. But for now, I don't believe investors are wrong for being extra cautious. Dave & Buster's still has a long way to go before its Going Concern is fully in the rearview mirror.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Busters Entertainment. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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