Sphere Entertainment’s stock price has taken a beating over the past six months, shedding 21.6% of its value and falling to $102.99 per share. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Sphere Entertainment, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Sphere Entertainment Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Sphere Entertainment. Here are three reasons you should be careful with SPHR, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Sphere Entertainment grew its sales at a 10.8% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash Flow Margin Set to Decline
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 next year, analysts predict Sphere Entertainment’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 26.5% for the last 12 months will decrease to 14.3%.
3. Restricted Access to Capital Increases Risk
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 $31.98 million of EBITDA over the last 12 months, and its $913.3 million of debt exceeds the $551 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.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Sphere Entertainment, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 13.8× forward EV-to-EBITDA (or $102.99 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Sphere Entertainment
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