Commission-free trading app, Robinhood, has introduced stock market investing to a wider range of retail investors, but not every popular stock on the platform is one that a Motley Fool would consider a good investment.
Dave & Busters (PLAY -2.33%) and Royal Caribbean (RCL 0.33%) are both companies that have found their way onto Robinhood's ever-changing list of top 100 most widely held stocks. Let's explore the reasons why following the lead of Robinhood's investors could end up sinking your portfolio in these two cases.
1. Dave & Busters: The coronavirus pandemic is an ongoing threat
Dave & Busters is an indoor entertainment company that features dining and arcade-style games. It's also a company that often finds itself on the Robinhood Top 100 list because of its popularity among retail investors with an eye for trendy companies.
Coronavirus-related lockdowns and movement restrictions battered the business in the second quarter -- sending revenue down 85% year over year to just $51 million in the period. And with the pandemic resurging, Dave & Busters may struggle to return to normalcy and manage its massive debt load.
U.S. daily COVID-19 infections have surpassed 120,000, according to recent data compiled by Johns Hopkins University. And while there may not be another nationwide lockdown, the surge could negatively influence consumer behavior and prolong restrictions at a local level. Dave & Busters has reopened 99 out of its 136 stores as of Oct. 4. But management has not guided on how well they expect to perform for the rest of the year.
While Dave & Busters has seen its open stores slowly recover toward 2019 revenue levels, investors shouldn't expect a full recovery anytime soon. That's because operations remain restricted in New York and California, which have historically generated around 25% of overall sales and a big amount of profit, according to CEO Brian Jenkins. The company is also burning through around $1.5 million per week as of September.
Dave & Buster's uncertain path to normalcy is a red flag for investors because its over-leveraged balance sheet could pose solvency challenges. The company has taken steps to reduce cash outflow by furloughing workers and reducing executive pay, but it still generated an operating loss of $81 million in the second quarter. With $732 million in long-term debt compared to just $224 million in cash and equivalents, Dave & Busters may struggle to meet its obligations.
2. Royal Caribbean: The no-sail order is lifted, but the industry is still in crisis
Royal Caribbean is a cruise operator that has been battered by the coronavirus pandemic. The crisis and the government's no-sail order from U.S. ports sent revenue to negative $33.7 million in the third quarter as the company reversed previously recorded sales because of cancellations. Royal Caribbean stock is popular among Robinhood users hoping to buy distressed stocks that have a chance for a fast price recovery under the right circumstances. It's a risky bet because its cash burn and heavy debt burden could suppress the stock price for some time, even as the industry normalizes.
The Centers for Disease Control and Prevention (CDC) has finally lifted its no-sail order and replaced it with a framework for slowly resuming passenger services. But investors shouldn't expect this development to boost cruise industry revenue or cash flow in the near term. In fact, it may lead to bigger operational losses as operators conduct test voyages with paid employees instead of paying customers.
It is still unclear when the CDC will really allow commercial cruising to resume. The organization recently upgraded its travel advisory on cruising from level two to level three, which recommends avoiding nonessential travel.
Royal Caribbean's balance sheet has deteriorated, and it will struggle to recover when (or if) the industry normalizes. The company reported an operating loss of $996.1 million in the third quarter and expects a monthly cash burn of $250 million to $290 million while operations remain restricted. With $17.6 billion in long-term debt compared to just $3 billion in cash and equivalents, the company looks overleveraged and will probably rely on equity dilution to sustain its operations and meet its debt obligations.
COVID-19 is still a massive challenge
It's tempting to follow the crowd -- especially on a platform like Robinhood that caters to people who may be less savvy about the stock market. But investors shouldn't let the popularity of Dave & Busters or Royal Caribbean encourage them to make a risky investment decision. Both companies will struggle to overcome the ongoing coronavirus pandemic and we don't know when a workable vaccine will be available to the general public.