Sphere Entertainment: An Update On Our Initial Report (Rating Downgrade)
Summary
- Sphere has risen by 75% since the initiation of our investment and 35.5% up since we published our report.
- As the story evolves from a pure value play to a growth play, we as value investors believe it’s time to take the profits.
- We believe it’s prudent to only leave a small portion of the gains to have a speculative bet on Sphere’s future trajectory.
Greg Doherty/Getty Images Entertainment
Investment Rationale
Sphere Entertainment (NYSE:SPHR) was a hidden gem which we uncovered in our first report. During that time Sphere faced selling pressure because everyone preferred MSGE’s operational assets instead of taking a bet on the speculative future of Sphere. We believed that the market was wrong to discount Sphere to such levels where it was trading at a 56% discount even on the initial cost of production. Furthermore, the earnings required to justify the valuation at that time were extremely low. Sphere was a unique, first of its kind project, we tried to highlight how easily it could generate the earnings required and how cheap it was from multiple angles.
Evolution of the Sphere Story
With a remarkable 75% increase in Sphere’s stock price we believe it’s prudent for us to revisit our perspective. As the story evolves from a deep value play towards more of a growth play and the other risks associated with this (please see Risk section in the last report) have forced us to rethink our position on this beautiful project.
Our Current Position on Sphere
This report serves to provide an update on our position with respect to sphere. We will not delve into the project intricacies or the financial details as they were covered in our last report.
In the recent earnings disclosure, the construction cost was reaffirmed at $2.3b which was a very big relief for the market as there had already been a lot of cost overrun since it was first announced. The other important thing to note was the continuous decline in MSGN as subscribers fell by 11% in the last quarter.
When asked about the nonrecourse loan on MSGN maturing next year, Dolan did not have a significant update on that front and we were not convinced from his answer, and it reaffirmed our belief that Dolan won't let go this legacy network. As highlighted in the last report Dolan family has a history of reengineering their companies to protect certain stakes. We believe any corporate reengineering of MSGN will potentially hurt sphere. On the sponsors front for sphere, again we did not get a very satisfying answer on the call.
We still believe in the potential of this project but with such a big move and currently trading at our calculated fair value, the risk reward profile for us has changed. The story from a value perspective is finished and in a good way for us, because of that we have been trimming our position since sphere reported its highs. At the moment, we have only left a small speculative position to capitalize on the opening in late September and the realization of other catalysts which can come in the form of earnings growth and improvement in investor sentiment as this gets more renown in the investor community.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPHR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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