Sphere Entertainment has been on fire lately. In the past six months alone, the company’s stock price has rocketed 75.7%, reaching $57.13 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Sphere Entertainment, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sphere Entertainment Will Underperform?
Despite the momentum, we don't have much confidence in Sphere Entertainment. Here are three reasons why SPHR 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 put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Sphere Entertainment’s 7.6% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the consumer discretionary sector.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, Sphere Entertainment’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 16.6%, meaning it lit $16.62 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Sphere Entertainment burned through $44.03 million of cash over the last year, and its $1.02 billion of debt exceeds the $397 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Sphere Entertainment’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Sphere Entertainment until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Sphere Entertainment falls short of our quality standards. After the recent rally, the stock trades at 12.6× forward EV-to-EBITDA (or $57.13 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Sphere Entertainment
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