Sphere Entertainment (SPHR)

Content production and distribution company Sphere Entertainment (NYSE:SPHR) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 12.7% year on year to $280.6 million. Its GAAP loss of $2.27 per share was 24.3% above analysts’ consensus estimates.

Company Overview

Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE:SPHR) hosts live entertainment events and distributes content across various media platforms.

Leisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Competitors in the live entertainment and content production industry include Live Nation (NYSE:LYV), Endeavor (NYSE: EDR), and Madison Square Garden (NYSE:MSGE).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Sphere Entertainment’s sales grew at a weak 2.4% compounded annual growth rate over the last five years. This was below our standards and is a rough starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Sphere Entertainment’s annualized revenue growth of 36.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated. Note that COVID hurt Sphere Entertainment’s business in 2020 and part of 2021, and it bounced back in a big way thereafter.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Sphere and MSG Networks, which are 56.1% and 43.8% of revenue. Over the last two years, Sphere Entertainment’s Sphere revenue (live events and advertising) averaged 9,691% year-on-year growth. On the other hand, its MSG Networks revenue (content distribution) averaged 8.6% declines.

This quarter, Sphere Entertainment reported a rather uninspiring 12.7% year-on-year revenue decline to $280.6 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 10.5% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Sphere Entertainment’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging negative 38.1% over the last two years. Unprofitable consumer discretionary companies that fail to improve their losses or grow sales rapidly deserve extra scrutiny. For the time being, it’s unclear if Sphere Entertainment’s business model is sustainable.

This quarter, Sphere Entertainment generated a negative 28% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sphere Entertainment’s earnings losses deepened over the last five years as its EPS dropped 3% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, Sphere Entertainment’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, Sphere Entertainment reported EPS at negative $2.27, down from negative $1.33 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Sphere Entertainment to improve its earnings losses. Analysts forecast its full-year EPS of negative $8.23 will advance to negative $7.52.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 33.8%, meaning it lit $33.75 of cash on fire for every $100 in revenue.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Sphere Entertainment’s five-year average ROIC was negative 11%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Sphere Entertainment posted negative $225.6 million of EBITDA over the last 12 months, and its $1.46 billion of debt exceeds the $478.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

We implore our readers to tread carefully because credit agencies could downgrade Sphere Entertainment if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Sphere Entertainment can improve its profitability and remain cautious until then.

We enjoyed seeing Sphere Entertainment beat analysts’ EPS expectations this quarter. On the other hand, its EBITDA missed significantly. Overall, this was a mixed quarter, but the stock traded up 4.3% to $31 immediately following the results.

Updated: May 15, 2025 at 11:41 PM EDT

When considering an investment in Sphere Entertainment, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

We see the value of companies helping consumers, but in the case of Sphere Entertainment, we’re out. For starters, its revenue growth was weak over the last five years. On top of that, Sphere Entertainment’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, and its cash burn raises the question of whether it can sustainably maintain growth.

Sphere Entertainment’s EV-to-EBITDA ratio based on the next 12 months is 7.4x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $48.30 on the company (compared to the current share price of $37.80).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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