What happened
Shares of Sphere Entertainment (SPHR +0.37%) rose 11.1% on Monday -- an achievement, considering that the broader S&P 500 closed the session virtually flat.
The company, formerly known as Madison Square Garden Entertainment, got a big boost over the weekend when the first concert was held at its new Sphere concert venue in Las Vegas -- a performance by the band U2.
Apparently, the reviews of the show, and the images and video circulating online, generated fresh excitement around the new tech-centric venue, which features first-of-their-kind massive LED screens that cover the entire interior and exterior walls of the concert hall.
NYSE: SPHR
Key Data Points
So what
Buzz has been circulating about the Sphere ever since its exterior screen was turned on this summer. Importantly for investors, the motion-picture graphics caliber of the screen on the exterior offers the venue's owner significant opportunities to bring in advertising revenue, in addition to revenues from live entertainment.
However, this weekend saw an entirely new level of excitement around the Sphere as the first videos of U2's show began circulating online. Consider this enthusiastic social media post:
Late stage empires don't build things this extraordinary.
-- Axial Wanderer (@EricWollberg) September 30, 2023
pic.twitter.com/H60w5vGKHi
The opportunity to pair their music with such eye-opening imagery is likely to attract more bands (and therefore, more fans) to the venue. Of note, U2 is planning 25 shows at the Sphere, with ticket prices ranging from $400 to $1,500. In addition, travelers to Vegas can also take tours of the Sphere and witness its technology as the main event, with tickets ranging between $50 and $200.
The company rebranded itself Sphere Entertainment back in April, although it still also owns the cash-generating MSG regional sports networks. In conjunction with that renaming in April, Sphere spun off its live entertainment venue business (except for the Sphere, obviously) into a new entity called Madison Square Garden Entertainment (MSGE 0.45%). That company consists of Madison Square Garden, the Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, and the Chicago Theatre. Immediately after that spinoff in May, Sphere sold off its majority stake in Tao Hospitality Group, which owns Tao nightclubs and other restaurants and club brands in Las Vegas and throughout the world, further streamlining the business.
Now what
Although the images posted of the Sphere are undeniably cool, from an investment standpoint, Sphere Entertainment bears more scrutiny. The company is currently generating big losses -- although those are bound to improve as they were mainly driven by the overhead costs associated with the Sphere in its pre-revenue state. Now that the Sphere has opened -- and apparently, successfully -- those losses are bound to narrow. Still, it's unclear how profitable the single venue will ultimately be.
Importantly, the majority of the company's economics are still coming from the MSG networks. While those networks are profitable, bringing in $169 million in operating profit over the fiscal year that ended June 30, they are struggling due to the broader cord-cutting trend in cable TV. In fiscal 2023, MSG Network revenue fell by 6%, and its $169 million in operating profit was down 18% from the prior year.
In addition, the company currently has $1.2 billion in debt against just $430 million in cash -- although Sphere still retains a roughly 20% stake in MSG Entertainment that was worth $341 million as of June 30 -- a stake it could liquidate if necessary.
Therefore, for those buying or wanting to buy based on this weekend's justified optimism around the Sphere, investors should note there is more to Sphere Entertainment's stock than just the success of the Sphere itself.
