Sphere Production Costs, Scalability Issues Prompt Sell Rating

Posted on: September 4, 2024, 10:11h. 

Last updated on: September 4, 2024, 10:38h.

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

Citing elevated production costs and issues with expansion, an analyst tagged Sphere Entertainment (NYSE: SPHR) stock with a “sell” rating.

Nevada casinos gaming revenue GGR
The Las Vegas Sphere lit up on Halloween. Sphere Entertainment was hit with a sell rating by research firm Benchmark. (Image: WTVM)

In a report to clients issued on Tuesday, Benchmark analyst Mike Hickey hit Sphere with the ominous rating and a $40 price target, which implies downside of about 9% from current levels. His bearish call on the Sphere comes in the midst of a pullback that’s seen the stock shed 9.54% over the past week. Still, the shares are higher by 15.9% over the past month and 30.55% year to date. Hickey noted there are significant risks to the Sphere investment thesis.

With only one screen to recoup these significant investments, the financial risk is substantial,” he observed.

The Las Vegas entertainment venue got off to a stellar start last year thanks to a series of live U2 concerts, but Sphere Entertainment needs to display proficiency in landing top-tier acts and programming to ensure “economic viability,” according to Hickey. Besides Benchmark, seven other sell-side firms cover Sphere, with three rating the stock “buy” or “strong buy,” and four rating it “hold.”

Don’t Expect More Spheres Soon

Las Vegas is arguably the ideal city for the Sphere, which is massive and emits constant light and noise. That’s the case with many venues on the Strip, and while those traits are common in Sin City, they’re not necessarily appealing to other cities.

London balked at a Sphere last year, with mayor Sadiq Khan calling it a “detriment to human health,” and opposition groups noting such a venue is appropriate for Las Vegas, but not for a town such as Stratford, which was where the company wanted to put its UK sphere. That highlights the scalability challenges facing the operator.

“Given that the original Sphere took five years and $2.3B to construct, rapid expansion seems impractical,” noted Hickey, adding that smaller versions of the Las Vegas Sphere probably aren’t attractive because they would lack appeal due to their diminutive stature, and economic opportunity could be threatened as a result.

MSG Networks Could Weight on Sphere Stock, Too

When Sphere was spun off from Madison Square Entertainment (NYSE: MSGE), regional sports networks (RSNs) MSG Networks and the YES Network were included with the former. That could be problematic because MSG Networks has $850 million in debt coming due next month.

If the RSN can’t refinance that obligation or land an equity infusion from Sphere to pay the tab, a default and potential bankruptcy are possible, according to Hickey. Sphere Entertainment investors would likely be irked by the latter option because they’d be diluted to the RSNs.

Hickey called Sphere Entertainment essentially an exhibitor business while adding that MSG Networks is a debt-ridden entity in a declining industry.