Over the last six months, Red Rock Resorts’s shares have sunk to $46.03, producing a disappointing 7.4% loss while the S&P 500 was flat. This might have investors contemplating their next move.
Is now the time to buy Red Rock Resorts, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Red Rock Resorts Will Underperform?
Despite the more favorable entry price, we're cautious about Red Rock Resorts. Here are three reasons why RRR doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Red Rock Resorts’s sales grew at a weak 1.7% compounded annual growth rate over the last five years. This was below our standards. 
2. Projected Revenue Growth Shows Limited Upside
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 Red Rock Resorts’s revenue to stall, a deceleration versus its 7.2% annualized growth for the past two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Red Rock Resorts’s ROIC averaged 3.3 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Red Rock Resorts doesn’t pass our quality test. Following the recent decline, the stock trades at 28.3× forward P/E (or $46.03 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Red Rock Resorts
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