Description

Recommendation: Long Sphere Entertainment Co. (SPHR) at current prices.

Thesis: I think SPHR can more than double over the next 12-18 months as compelling earnings power from the Las Vegas Sphere, additional Sphere announcements, and a resolution of the MSG Network debt silo will drive significant earnings power and multiple re-rating. Notably, Jim Dolan (CEO) has not personally bought stock on the open market in any of his public companies in the last 8 years but in the last 3 weeks has bought ~$20 mm at the highs.

Price Target: I see 15% upside in the base case and a 4x1 upside/downside. In the base case I assume 15x Sphere AOI of $150 mm and zero MSGN equity value, and a 10% NAV discount. In the bull case, the stock could more than double ($110 PT / 125% upside) if new Las Vegas Sphere earnings power comes through ($250 mm) and more OUS Spheres are announced, which will provide substantial uplift to earnings power with little capital. I think each OUS Sphere is worth $10 / 20-25% upside to the stock, and there are at least two in the pipeline that will likely be announced soon. In the bear case, I assume Las Vegas Sphere disappoints on normalized earnings power, use a low multiple, and assume MSGN is worth negative $100 mm translating to 30% downside.

Situation Overview:

• SPHR is the RemainCo of legacy MSGE following the spin-off of MSGE in April ’23 and currently operates the following two businesses:
  • Sphere: state-of-art entertainment venue(s) that primarily generate revenue from original immersive productions (e.g. Sphere Experiences like Postcard from Earth), as well as concerts and residencies from renowned artists (e.g. U2, Phish, and Dead & Co). The first Sphere opened September ’23 in Las Vegas, was built for $2.3bn and can host up to 20k guests. The company expects to announce additional Spheres in other major cities internationally under a capital-light franchise model.
  • MSG Networks (MSGN): regional sports and entertainment networks undergoing steady secular decline which I don’t ascribe value to and is less relevant for the purposes of this discussion. There is an MSGN term loan that is non-recourse to SPHR and will need to be addressed prior to its maturity in October, but the likely resolution will have little to no impact on SPHR equity value.
• SPHR is a Dolan controlled entity among other companies such as MSGS, MSGE, and AMCX. Jim Dolan (Executive Chairman and CEO) has been buying a meaningful amount of SPHR stock in the open market and correspondingly selling down his MSGE / MSGS holdings in recent weeks.

Why the opportunity exists:

• Earnings Power
  • The street is overly conservative and skeptical of SPHR’s earnings power as there are no great comparable venues to benchmark the uniqueness of the LV Sphere’s offerings. However, Sphere AOI has already inflected positively in the first real quarter of operation, and I think the company has disclosed enough datapoints to inform growth trajectory from here. I see significant upside in Sphere revenue and AOI in FY’25 / FY’26.
  • I am 5% ahead of street on revenue from upside in both event-related and sponsorship / ad revenue.
    • I see event-related revs growing in the HSD range supported by MHSD per cap growth for both residencies and Postcard that are currently in the $100-120 range, which I think is reasonable given the pricing power Sphere is able to exercise for live events of such unprecedented form on top of standard inflationary pressure across live entertainment. Overall demand and upside from Postcard is driving meaningfully better profitability than management initially expected. I model LSD attendance growth on incremental growth in demand and number of Postcard / residency shows, offset by capacity constraints given occupancy rates are creeping up to 70-90% across various formats and timings of shows.
    • I expect sponsorship / ad revs to ramp sequentially to a $150-160m business growing at MHSD as the Exosphere (exterior screen) sees increased uptake from advertisers. SPHR called out significant announcements to come on Exosphere advertising, but there is likely upside from additional inventory coming on (e.g., naming rights and interior signage).
  • Moreover, with more than half of current Sphere’s $400m SG&A base supporting future Spheres and overhead (e.g. studios, tech, corporate), there is a large massive opportunity for operating leverage and cost take out as investments for the initial LV Sphere and development costs for future Spheres start to bear fruit and phase away. I expect SG&A to decline in the MHSD range going into FY’26 (assuming no additional spheres after Abu Dhabi and South Korea), which coupled with topline outperformance translates to 80% upside vs street on Sphere AOI for FY’25 / FY’26 at $150m / $240m.
  • I am undifferentiated on MSGN financials and see a steady decline due to secular pressure, though that is less relevant to the stock.
• Additional Spheres
  • I think the company announces plans for additional OUS Spheres to be built in a capital-light manner, which will translate to significant upside to the stock. On the most recent earnings call, the company flagged that they are having substantive discussions on OUS Spheres and expect to reach an agreement soon. My read is that an announcement is coming imminently.
  • Going forward with a franchise model that is capital-light will generate incremental high margin franchise fees from the onset. There are at least two potential OUS Spheres currently in the pipeline (South Korea and Abu Dhabi) that seem to be in the later stages of discussions according to public headlines. Conservatively assuming that an OUS Sphere achieves ~75% of LV Sphere revs and further sensitizing across MHSD franchise fee split scenarios, the discounted (assumes 3Y ramp) NAV / share is worth $10 for each OUS Sphere / 20-25% upside for the stock.
• MSGN Silo
  • The MSGN debt is non-recourse to SPHR, and I am of the view that management will not put good money after bad to address the upcoming MSGN term loan maturity in October. Management has been consistently firm that they are not going to do anything that hinders their ability to drive growth for the Sphere.
  • The resolution timeline is likely somewhere between summer and maturity. While a resolution could have a range of outcomes (small pay down or haircut, some amount gets kicked down the road, or the company just walks away), much of the MSGN debt should rightfully not be penalizing SPHR from a valuation standpoint.
• Jim Dolan
  • Jim Dolan has been buying a meaningful amount of SPHR stock in the open market and correspondingly selling down his MSGE / MSGS holdings in recent weeks. This is a powerful signal on his optimism for SPHR as Jim buying stock in his companies has pretty much been unprecedented in history (the only instance was in 2016).

Risks:

• This is still a show me story in the early stages of proving out its fundamentals. I could be wrong about Las Vegas Sphere earnings power (maybe this is all a fad). The market extrapolates a portion of future earnings power based on recent quarterly earnings which could be volatile, and the stock could trade off meaningfully if there is a downside surprise in the NT.
• Dolan torches hundreds of mm of $ into the MSGN silo due to relationship banking issues / ego both hurting intrinsic value and resulting in a larger Dolan discount.

Apologies in advance: I am not able to respond to questions in the Q&A thread.

Exhibit 1: SPHR SoTP

Exhibit 2: Incremental NAV / Share Sensitivity from Additional Spheres

Exhibit 3: Summary Financials

Catalyst

• Each earnings print is a positive catalyst as I expect SPHR to beat and estimate revisions to follow, such that the street can get more comfortable with the path to meaningful profitability from here.
• New OUS Spheres announcements to be built in a capital-light franchise model. South Korea and Abu Dhabi seem the most likely ones in the NT.
• Additional headlines about residencies and other events / attractions at the LV Sphere, as well as new sponsorship deals.
• Dolan (or other insiders) buy more SPHR shares from here.