On Wednesday, Wolfe Research raised its rating on Sphere Entertainment (NYSE: SPHR) shares from Peerperform to Outperform, setting a price target of $60.00. The firm identified the potential for the company to benefit from an expanding content library and the likelihood of a new venue deal that could significantly enhance value.
Sphere Entertainment, known for its Vegas show experiences, has seen a decline in per-show economics since its opening. However, Wolfe Research anticipates that a broader content library will positively impact the company in the future.
Moreover, the potential establishment of a new venue is expected to contribute approximately $700 million in value for each new venue constructed. This estimate is based on the projection that Sphere Entertainment will receive a 10% royalty on roughly $500 million in sales at a 95% incremental margin.
The analyst noted that the Sphere business model and cost structure are designed to support expansion. The success of the Vegas venue is seen as evidence of the economic viability of the Sphere concept, which is expected to encourage prospective venue builders.
The price target of $60 is derived from a sum-of-the-parts (SOTP) valuation method. Within the Sphere segment, the Vegas Sphere is valued based on an enterprise value/contribution profit basis, applying a multiple of 15 times. Sphere's overhead and selling, general, and administrative expenses (SG&A) are valued separately at 12 times, as these costs are expected to support the current and future Sphere venues without requiring significant growth.
Wolfe Research also estimates the value of future Sphere expansion at $1.2 billion. This valuation is based on a discounted cash flow (DCF) analysis that assigns a very high probability to the development of a second Sphere and a 75% chance for a third. The firm values MSG Networks (MSGN) at 4 times enterprise value/adjusted operating income (EV/AOI) and anticipates that its $830 million debt will be reduced to $400 million.
The upgrade to Outperform reflects Wolfe Research's confidence in Sphere Entertainment's growth trajectory and its ability to capitalize on new opportunities.
In other recent news, Sphere Entertainment has reported substantial revenue of approximately $273 million in its Fiscal 2024 Fourth Quarter and adjusted operating income is $25.7 million.
Guggenheim maintained a positive outlook on Sphere Entertainment, adjusting its price target to $63 while keeping a Buy rating. This adjustment was influenced by potential licensing revenue from at least one international Sphere venue. However, BofA Securities and Benchmark expressed concerns over Sphere Entertainment's profitability and scalability, respectively.
Sphere Entertainment has also disclosed a new employment agreement with Andrea Greenberg, President & CEO of its subsidiary MSG Networks Inc., promising her a target bonus opportunity of at least 50% of the annual target during a six-month transition period. The company revised its stock award agreements, allowing for a case-by-case determination of vesting schedules, providing flexibility for employees.
These are recent developments that demonstrate Sphere Entertainment's commitment to growth and innovation. The company is actively developing new cinematic attractions and planning for global expansion into international markets. Despite facing challenges, Sphere Entertainment continues to strategize and innovate in its operations.
InvestingPro Insights
Recent InvestingPro data provides additional context to Wolfe Research's optimistic outlook on Sphere Entertainment (NYSE: SPHR). The company's revenue growth of 78.95% in the last twelve months as of Q4 2024 aligns with the analyst's expectations of an expanding content library. This growth is further supported by a strong EBITDA growth of 146.74% over the same period.
However, investors should note that Sphere Entertainment is currently not profitable, with an operating income margin of -14.88%. This aligns with an InvestingPro Tip suggesting that analysts do not anticipate the company to be profitable this year. Despite this, the company's Price to Book ratio of 0.64 indicates that it might be undervalued relative to its assets, potentially supporting Wolfe Research's bullish stance.
Another InvestingPro Tip highlights Sphere's strong return over the last three months, which is corroborated by the 21.34% price total return over the same period. This recent performance may reflect growing investor confidence in the company's expansion plans and potential new venue deals, as discussed in the Wolfe Research analysis.
For readers interested in a more comprehensive analysis, InvestingPro offers 5 additional tips for Sphere Entertainment, providing a deeper understanding of the company's financial position and market performance.
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