Playa Hotels & Resorts’s 38.4% return over the past six months has outpaced the S&P 500 by 31.8%, and its stock price has climbed to $12.04 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Playa Hotels & Resorts, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Despite the momentum, we're sitting this one out for now. Here are three reasons why there are better opportunities than PLYA and a stock we'd rather own.

Why Do We Think Playa Hotels & Resorts Will Underperform?

Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ:PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.

1. Weak RevPAR Growth Points to Soft Demand

We can better understand Travel and Vacation Providers companies by analyzing their RevPAR, or revenue per available room. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Playa Hotels & Resorts’s demand characteristics.

Playa Hotels & Resorts’s RevPAR came in at $252.12 in the latest quarter, and over the last two years, its year-on-year growth averaged 12.1%. This performance slightly lagged the sector and suggests it might have to invest in new amenities such as restaurants and bars to attract customers - this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead).

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Playa Hotels & Resorts’s revenue to drop by 2.3%, a decrease from its 8.2% annualized growth for the past two years. This projection is underwhelming and implies its products and services will face some demand challenges.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Playa Hotels & Resorts historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.9%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

Final Judgment

Playa Hotels & Resorts falls short of our quality standards. With its shares beating the market recently, the stock trades at 23× forward price-to-earnings (or $12.04 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at MercadoLibre, the Amazon and PayPal of Latin America.

Stocks We Like More Than Playa Hotels & Resorts

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.