Sphere Entertainment Has ‘Too Many Unknowns,’ Says Analyst

Posted on: August 25, 2023, 11:32h. 

Last updated on: August 27, 2023, 11:40h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Sphere Entertainment (NASDAQ: SPHR), the owner of the MSG Sphere on the Las Vegas Strip, may be leaving analysts and investors with more questions than answers.

Sphere Entertainment
The Sphere illuminated in Las Vegas on July 4, 2023. An analyst is tepid on owner Sphere Entertainment. (Image: YouTube)

That’s the take of Macquarie analyst Paul Golding, who reiterated a “neutral” rating on the stock in a new note to clients, though he did boost his price target to $32 from $25. That implies some downside from the August 24 close at $34.27. Golding observed that beyond the upcoming U2 residency, management noted on the company’s recent fiscal fourth-quarter earnings conference call that follow-up acts may not be on the level of U2.

Management referenced other potential residencies as not necessarily being acts as big as U2 — this softens our view on venue rental revenues,” wrote the analyst. “Our model continues to suggest that much of the revenue story will ride on original attractions, which we view as a swing factor in the profitability of the entire business given the novel format and higher pricing vs. traditional exhibitors.”

Located at 255 Sands Ave., the Sphere illuminated for the first time on July 4, but its official opening date is September 29, the date of U2’s first show there.

Sphere Entertainment Faces Subscriber Attrition

Las Vegas locals and visitors to the Strip are becoming acquainted with the Sphere through its various illuminations, some of which have been dubbed distracting by naysayers.

However, there’s much more to the business. Sphere Entertainment results from the spin-off Madison Square Entertainment (MSGE). MSGE retained the formerly combined company’s live entertainment business. Still, Sphere maintains ownership of the MSG Networks, the local broadcaster of the NBA’s New York Knicks and the NHL’s New York Rangers. The problem is that subscribers are departing.

“While Sphere segment ambiguity persists, one thing was clear — MSGN sub declines were bad, running -11.5% year-over-year after a -10% fiscal third quarter,” added Golding. “DTC may help a bit, but it’s too early to tell how much — and MSG Sports still needs Networks in our view.”

“DTC” references MSG Networks’ direct-to-consumer offering MSG+, which is expected to debut ahead of the upcoming NBA and NHL seasons.

Sphere in Prove It Mode

The Sphere is a widely anticipated project, but one that’s also been beset by cost overruns, with the company recently revealing high inflation boosted the Sphere’s cost by $175 million to $2.175 billion.

To appease investors, the company needs more than U2. It has an agreement with Formula 1 in advance of the circuit’s upcoming Las Vegas Grand Prix in November 2023, and that’s a start, but more marquee shows and events will be required.

“Still too many unknowns for us on the venue, including the timeline on reaching full potential,” concluded Golding. “The slate may be cleared up in the near future, but questions around the cost structure for such a novel format will persist in the medium term — all of this with Networks shedding subs.”