What a brutal six months it’s been for Dave & Buster's. The stock has dropped 36% and now trades at $19.30, rattling many shareholders. 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 Dave & Buster's, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Even with the cheaper entry price, we're cautious about Dave & Buster's. Here are three reasons why you should be careful with PLAY and a stock we'd rather own.

Why Do We Think Dave & Buster's Will Underperform?

Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ:PLAY) operates a chain of arcades providing immersive entertainment experiences.

1. Flat Same-Store Sales Indicate Weak Demand

We can better understand Leisure Facilities companies by analyzing their same-store sales. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Dave & Buster’s underlying demand characteristics.

Over the last two years, Dave & Buster's failed to grow its same-store sales. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Dave & Buster's might have to change its strategy and pricing, which can disrupt operations.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the last two years, Dave & Buster’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.1%, meaning it lit $1.14 of cash on fire for every $100 in revenue.

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.

Dave & Buster's burned through $182.3 million of cash over the last year, and its $3.05 billion of debt exceeds the $8.6 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Dave & Buster’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 Dave & Buster'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 Dave & Buster's, we’re out. Following the recent decline, the stock trades at 6.1× forward price-to-earnings (or $19.30 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. We’d suggest looking at the Amazon and PayPal of Latin America.

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