Sphere Entertainment Earns Price Target Lift as Profitability Emerges

Posted on: December 6, 2023, 03:16h. 

Last updated on: December 9, 2023, 01:16h.

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

After plunging Tuesday, shares of Sphere Entertainment (NYSE: SPHR) rallied Wednesday after the company forecast positive adjusted operating income (AOI) for its fiscal second quarter, an impressive feat when considering Wall Street was expecting a loss.

Las Vegas Strip casino gaming revenue
Fans wait outside the Sphere during the immersive music venue’s opening night on Sept. 29, 2023. Analysts are growing bullish on Sphere Entertainment shares. (Image: Las Vegas Review-Journal)

Sphere detailed the profitability expectations in an 8-K filing with the Securities and Exchange Commission (SEC), stoking some positive commentary from analysts who cover the newly public company. In a note to clients on Wednesday, Macquarie analyst Paul Golding boosted his price target on the stock by 6% to $34. That implies upside of 19.6% from the December 5 close. The analyst noted the initial run of U2 shows at the Sphere is proving beneficial to the operator.

The 17 U2 shows (largely sold out) through November 30 and since the venue’s grand opening have driven $30.7m in total revenue, or ~$1.8m per show,” wrote the analyst. “Postcard from Earth has held 111 showings since debut and through November 30, running ~3x/day, yielding ~$44.5m in ticket revenues, or ~$400k per seating. Management noted ticket sales momentum continued into November, with average daily ticket revenue above $1m.”

In late trading, shares of Sphere are higher by 8.34% on volume, which is 7.7x the daily average.

Sphere Entertainment Issuing Convertible Debt

Sphere Entertainment also told investors it’s selling $225 million of convertible debt to finance “Sphere-related growth initiatives.”

Convertible debt differs from traditional corporate bonds in that buyers of the former can eventually convert those bonds into shares of common equity of the issuing company. As such, these bonds have more equity-like traits than those in other corners of the fixed-income market. Sphere’s convertibles were sold at a 3.5% interest rate and a conversion premium of 25% to Tuesday’s closing price.

“Management has emphasized on prior calls that future venues would involve partners or be franchised,” added Golding. “We believe this could indicate some progress on discussions, and think it is possible that capital may be needed for some ‘skin in the game’ on other locations.”

The analyst lifted his 2024 through 2026 AOI forecasts on Sphere to $57.3 million, $144.6 million, and $126 million, respectively, from a 2024 loss of $9.9 million and 2025 and 2026 profitability of $73.6 million and $109.7 million.

Separately, the NHL announced Tuesday that its 2024 draft will take place at the Sphere. The league has established ties to Las Vegas via the defending Stanley Cup champion Golden Knights.

Other Analysts Bullish on Sphere

In addition to Macquarie’s Golding, other analysts are warming to Sphere. Guggenheim’s Curry Baker boosted his rating on the stock to “buy” from “neutral.” He noted potential upside for the stock if the Dolan family, which controls Sphere, decides to move on from the money-losing regional sports networks (RSN) that fall under Sphere’s corporate umbrella.

We would also note there is another $7 [per share] of value if SPHR walks away from the underwater RSN (regional sports network) business. We assume management will be rational next year in evaluating the RSN options. More clarity on what the company intends to do with the RSN business will likely occur next Spring/Summer,” observed the Guggenheim analyst.

MSG Networks broadcast games for the New York Knicks and New York Rangers, both controlled by the Dolans.