Analyst says Sphere Entertainment has 'too many unknowns'
Sphere Entertainment (NASDAQ: SPHR ), owner of the Las Vegas Strip's MSG Sphere, may have more questions than answers for analysts and investors.
That's the view of Macquarie analyst Paul Golding, who reiterated his "neutral" rating on the stock in a new note to clients but raised his price target to $32 from $25. This represents a modest decline from the August 24 closing price of $34.27. Goldin noted that beyond the upcoming U2 Residency, management indicated during the recent fiscal fourth-quarter earnings call that follow-ups likely wouldn't be on U2-level.
Management noted that other potential residency projects would not necessarily be as ambitious as U2's, which weakens our view on venue rental revenue. ” the analyst wrote. “Our model continues to suggest that the majority of revenue growth is driven by original attractions, which we believe is overall business profitability given novel formats and higher pricing compared to traditional exhibitors Key drivers of capabilities. "
The Sphere is located at 255 Sands Blvd. and was lit for the first time on July 4th. However, the official opening date is September 29, the day U2 played their first show there.
Sphere Entertainment faces declining subscriber numbers
Locals and Strip visitors from Las Vegas can learn about the sphere by its various lights, which some critics have called distracting.
However, there is more to this business. Sphere Entertainment is a spin-off from Madison Square Entertainment (MSGE). MSGE retains the live entertainment businesses of the previously merged companies. However, Sphere remains the owner of MSG Networks, the local broadcaster for the NBA's New York Knicks and NHL's New York Rangers. The problem is subscriber churn.
Golding added: "While uncertainty remains in the Sphere space, one thing is clear: The MSGN sub-segment decline was steep, down -11.5% year over year, following a -10% decline in the fiscal third quarter." "DTC can help a little bit, but it's too early to say how much - we think MSG Sports still needs the network."
"DTC" refers to MSG Networks' direct-to-consumer service MSG+, which is expected to launch ahead of the upcoming NBA and NHL seasons.
Bullets in evidence mode
The Sphere was a highly anticipated project that was plagued by cost overruns. The company recently announced that high inflation has pushed Sphere's costs up by $175 million to $2.175 billion.
To satisfy investor demand, the company needs more than just U2.A deal has been struck with Formula 1 ahead of the upcoming Las Vegas Grand Prix in November 2023, which is just a start but many more big shows and events are needed.
“There are still so many unknowns about this venue, including the timetable for reaching its full potential,” Golding concluded. "It's possible the situation will be clarified in the near future, but in the medium term questions remain about the cost structure of this novel format - and all because networks are cutting back on subscribers."
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