Over the last six months, Golden Entertainment shares have sunk to $28.63, producing a disappointing 15.1% loss - worse than the S&P 500’s 1.9% drop. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Golden Entertainment, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Golden Entertainment Not Exciting?
Even with the cheaper entry price, we're cautious about Golden Entertainment. Here are three reasons why GDEN doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Golden Entertainment’s demand was weak and its revenue declined by 7% per year. This wasn’t a great result and signals it’s a lower quality business. 
2. Projected Revenue Growth Is Slim
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 Golden Entertainment’s revenue to rise by 2.8%. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Golden Entertainment has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.9%, lousy for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Golden Entertainment to make large cash investments in working capital and capital expenditures.
Final Judgment
Golden Entertainment’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 5× forward EV-to-EBITDA (or $28.63 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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