Though down from their peak a few months ago, shares of Sphere Entertainment (SPHR -1.68%) have notched an impressive 75% gain in 2023 -- and perhaps for good reason. The venue that Sphere Entertainment owns -- The Sphere in Las Vegas -- has been open since the end of September and is apparently raking in ample ticket sales, especially for the marquee headliner, rock band U2.
At this juncture, the Sphere is a technological marvel, but the business itself is still an unprofitable one. That could change this next quarter, though. Is it time to buy stock in the Las Vegas Sphere? Here are some important things to consider.
A technological feat, and maybe a financial turning point
For the first quarter of Sphere Entertainment's fiscal 2024 (the three months ended Sept. 30), revenue totaled $118 million, down from $123 million a year ago. Operating losses came to $69.8 million, an increase from a $51.1 million loss last year.
Of the total revenue, only $7.8 million came from the Sphere itself. What gives? Bear in mind that the opening of the Las Vegas property with the first showing of a multi-month U2 residency was on Sept. 29, the day before the end of this quarter. Thus, with the Sphere only just beginning to generate revenue, the ramp-up to the grand opening was the reason for meager sales and ongoing losses.
For Q2 2024 (the final three months of 2024), the financials could look dramatically different. CEO James Dolan said on the earnings call that Sphere averaged over $1 million in daily ticket sales during the month of October.
And advertisers (including Alphabet promoting its YouTube TV NFL Sunday Ticket service for football fans) are also now making use of the impressive exterior digital displays of the Sphere -- a sight to behold amid the already glistening Vegas skyline. Dolan and the top team believe the Sphere can be profitable all on its own, without the need to build or license more "Spheres" in other markets around the globe.
Time will tell. But suffice to say that Q2 2024 could be a financial turning point for Sphere Entertainment as revenue streams ramp up and profitability becomes a real possibility.
Too risky, or room for big upside?
But what of the bulk of Sphere Entertainment's revenue? As I discussed a couple of months ago, much of the business up to this point is actually the operation of MSG Networks, the media arm of Dolan's empire that handles TV and streaming distribution of the NBA's New York Knicks and NHL's New York Rangers, which is owned by a separate entity, MSG Sports.
On a stand-alone basis, MSG Networks is profitable. Specifically, it generated an operating margin of 26% last quarter. That's of course not enough to offset losses at the Sphere, but again, this could be a nice sidecar type of business once the Sphere really gets rolling in the coming quarters.
At this juncture, what we still don't know is just how profitable the Sphere can become on its own merits. Day-to-day operations still need to be ironed out, more content created for the immersive experience the Sphere offers, and debt taken out to build the venue ($1.2 billion in total debt at the end of September) will need to be serviced.
With the Vegas venue in the early stages of selling tickets and ads, Sphere Entertainment has my interest. But questions linger. For now, I'm still in wait-and-see mode before I decide to nibble on the stock.
Instead, I recently decided to buy a few more shares of Shift4 Payments (FOUR 0.22%), which is handling credit card acceptance for ticket sales (via an integration with Live Nation Entertainment's Ticketmaster) for the Sphere. In a few more months, we should have some more info on how Sphere Las Vegas, potentially a top travel and entertainment venue, is faring now that it's open for business.
