Goldman Initiates Buy On Vegas Sphere, Says "Fad" Concerns Exaggerated

Shares of the Las Vegas Sphere (officially the MSG Sphere), owned by Sphere Entertainment Co (SPHR), have plunged into a vicious bear market this year amid fears that its subsidiary, MSG Networks—a regional sports network—faces potential bankruptcy. Nevertheless, Goldman Sachs analysts Stephen Laszczyk and Antares Tobelem have initiated coverage with a "Buy" rating, arguing that the upside potential for the Las Vegas Sphere is solid and that the market has overstated the risks tied to MSG Networks. 

MSG bankruptcy fears have sent SPHR shares tumbling 36% since peaking at around $48 in mid-February. Short interest has surged to 7.7 million shares—approximately 29.5% of the total float.

On Thursday, Laszczyk and Tobelem provided clients with a detailed note about their decision to initiate a "Buy" rating on SPHR: 

1. We initiate on Sphere Entertainment (SPHR) with a Buy rating and a $42 price target (12-month), representing 24% potential return. At $33.80 a share (off ~20% YTD through 3/26), we believe that the market is currently under-appreciating two key aspects of the company's growth story and over-estimating a potential risk.

The analysts explained more about their bullish call, outlining three bullish reasons: 

1. Specifically, we believe that the market is under-appreciating the opportunity for the Las Vegas Sphere to continue to reinvent itself with new content and improve execution to grow Revenue and AOI (GSe is ~5% above consensus for Sphere segment AOI),

2. under-appreciating the opportunity to add additional Sphere franchises around the globe (see addressable market analysis inside), and

3. over-estimating the likelihood that a workout of the MSG Networks debt will be value destructive.

The value in SPHR is based on the Las Vegas Sphere, the world's largest spherical structure—equipped with a 16K resolution LED screen that wraps around the audience for a fully immersive visual experience, which surpasses even legacy venues like Madison Square Garden. 

Org Chart Overview across the MSG Complex

The analysts expect increased operational improvement through increased utilization of show days, better programming cadence, and higher ticket and hospitality pricing. Their model forecasts the Sphere segment AOI to increase significantly, from -$20M in 2024 to $158M in 2027E, outpacing the average analyst estimates on Wall Street. With premium experiences, flexible scheduling, and continued demand for immersive content, the analysts believe the Sphere is positioned for multiple years of continued growth despite "newness" fading fears. 

"While we appreciate the argument that The Sphere has benefited from its "newness" in its first year of operation, we believe concerns that the venue is a fad and will have difficulty reinventing itself to drive continued interest are exaggerated. We see opportunity for The Sphere to add content, optimize show count and timing, and improve operations in a way that translates into continued growth," the analysts said. 

We believe SPHR is currently trading at a value that only captures the visible revenue streams from the LV and AD Spheres

Las Vegas Sphere Lifetime Foot Traffic

Each additional Sphere build in a new city could generate low tens of millions in AOI for SPHR through royalty fees alone

The Las Vegas Sphere show count should be near that of the entire 5-venue MSGE footprint by ~2027 due to improved utilization

The event count for Sphere Experience has stabilized at ~60-70 shows per month...

Capacity of the 10 Most Comparable Las Vegas Venues to the MSG Sphere

Meanwhile, the MSG Networks segment faces secular headwinds from cord-cutting and unfavorable carriage renegotiations. The analysts expect that "successful renegotiation of MSG Networks' debt terms, without the need from Sphere Entertainment to inject significant capital, would be a net positive for Sphere's stock, which we believe appears to be pricing in some risk that Sphere Entertainment uses its own capital to bail creditors out."

All in all, the analysts have a $42 price target, which reflects a blend of current positive Sphere performance, potential franchise expansion, and a low probability of value destruction from MSG Networks' debt issues. 

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