Sphere Entertainment Co. (NYSE:SPHR): Edging Towards a Bearish Zone

An analysis by MarketEuphoria on ValueInvestorsClub offers a bearish perspective for Sphere Entertainment Co. (NYSE:SPHR). SPHR shares were trading at $43.98 when the valuation was done by MarketEuphoria, vs. the closing price of $40.32 on Dec 31.

A group of people in a large music venue, enjoying a vibrant concert.

SPHR operates as a live entertainment and media company in the United States. It operates through two segments, Sphere and MSG Networks. The Sphere business offers cutting edge entertainment technologies with multi-sensory experiences. MSG Network is focused on regional sports and entertainment networks.

The Sphere business witnessed a 91% rise in ticket prices from $49 to $94. However, the average revenue per show has actually declined in 2024, implying that the volumes trended lower. The segment looks to diversify its screenings which currently predominantly offer Postcard from Earth. The maximum screen utilization is unlikely to breach the 80% mark due to the demand. Sphere is expected to grow by 5% in FY25 on account of higher volumes, with prices remaining stable. Concerts should grow by 15% and Advertising revenue should increase by 12-24% in 2025.

While the growth measures seem reasonable, the current valuation implies a multiple of almost 18x given the current level of Adjusted Operating Income (AOI).  While the base level AOI is achievable, there are a number of factors that could dampen the future profitability of the business. The company has a high fixed cost base that includes $27 million interest expense along with maintenance capex. A slight decrease in sales could render the current price expensive.

The FCF multiple suggests that SPHR is currently valued at 31x. Considering the capex in 2024, the multiple could rise to 37x on account of lower Free Cash Flows. Again, SPHR needs to maintain its baseline growth sales in order to justify a higher valuation and at the same time manage its cash flows more efficiently.

The current price is marginally lower to the intrinsic value when a high adjusted EBITDA multiple (20x) is used. This may be a best-case scenario assuming things remain normal at SPHR. If the riskiness is factored in and a lower multiple is applied, the stock may no longer be an attractive investment. For example, a multiple of 15x would make the stock overvalued by almost 15%.

While we acknowledge the potential of SPHR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SPHR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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