3 Reasons to Avoid SPHR and 1 Stock to Buy Instead

The past six months have been a windfall for Sphere Entertainment’s shareholders. The company’s stock price has jumped 119%, hitting $92.57 per share. This run-up might have investors contemplating their next move.

Is now the time to buy Sphere Entertainment, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Sphere Entertainment Will Underperform?

We’re happy investors have made money, but we don't have much confidence in Sphere Entertainment. Here are three reasons there are better opportunities than SPHR and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Sphere Entertainment’s sales grew at a weak 8.5% compounded annual growth rate over the last five years. This fell short of our benchmark for the consumer discretionary sector.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Sphere Entertainment has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.9%, lousy for a consumer discretionary business.

3. New Investments Bear Fruit as ROIC Jumps

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sphere Entertainment’s ROIC averaged 1.4 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Final Judgment

We see the value of companies helping consumers, but in the case of Sphere Entertainment, we’re out. After the recent rally, the stock trades at 13.8× forward EV-to-EBITDA (or $92.57 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.

Stocks We Like More Than Sphere Entertainment

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