By Andrew Bary

Sphere Entertainment's shimmering and audacious Las Vegas arena draws raves from concertgoers thanks to its cutting-edge sound system and top-flight acts like U2 and the Eagles. Its shares could soon attract an audience of their own.

The stock, now trading around $33, is no Wall Street favorite, however. Sphere is down 17% this year and trades for 35% less than its early-2024 high of about $51.

The company is in better shape than the stock. The bull case on Sphere focuses on earnings from its Las Vegas arena, another one to be built in Abu Dhabi, and other possible Spheres around the world.

Investors are paying little for that potential. Sphere Entertainment carries a market value of just $1.2 billion and net debt of $350 million after a debt restructuring that shaved $500 million from the total. Sphere is valued at a fraction of the $2.3 billion it took to build the Las Vegas Sphere and for half of its book value. John Rogers Jr., founder and chief investment officer at Ariel Investments, recently said that Sphere Entertainment was trading for about a 50% discount to his estimate of net asset value.

Wolfe Research analyst Peter Supino agrees. He called Sphere Entertainment "shockingly undervalued" in a report after the April debt restructuring. "For around $1 billion, investors can own what could be a global network of differentiated properties," he tells Barron's.

The Sphere Entertainment story is complicated. It is CEO James Dolan's baby -- an odd pairing of concert arena and regional sports network, reflecting a decision to merge MSG Networks with Sphere Entertainment in 2022 to provide earnings as the arena construction continued. It was completed in 2023.

To make matters worse, Wall Street applies a "Dolan discount" to the three companies controlled by New York's Dolan family: Sphere Entertainment; New York Knicks and Rangers owner Madison Square Garden Sports; and Madison Square Garden Entertainment, which owns Manhattan's MSG arena. That reflects concerns that the Dolans will prioritize control over what's best for all shareholders. MSG Sports, for instance, is valued at half the estimated value of the two teams because the Dolans are viewed as unlikely to sell.

James Dolan laid out his strategy on the company's earnings conference call this past Thursday.

"It's all about growth and our ability to take a great product and expand it across the globe," Dolan said. He added that the company maximizes Vegas Sphere revenue by using it "365 days a year, with multiple events during the day."

The initial Sphere discount wasn't unreasonable. MSG Networks, a regional sports network that carries Knicks and Rangers games, has seen its earnings drop in recent years amid cord-cutting and is viewed as an albatross for Sphere Entertainment. The company also had too much net debt -- around $850 million after cash is stripped out -- a factor that weighed on the stock.

Sphere negotiated for six months with a bank group holding some $800 million of MSG Networks debt to cut that burden, emboldened because the debt was non-recourse to Sphere, meaning the parent wasn't on the hook for it. The deal marked a win for Sphere since it reduced that debt by over $500 million; MSG Networks also got relief from MSG Sports from lower annual payments for broadcast rights to the sports teams.

"Without a mountain of debt, we believe that MSGN will be sold, merged, or split out of Sphere," Supino wrote. Such an action would cheer Wall Street, since the Sphere potential is the reason investors own the stock.

It has plenty of potential. The Vegas Sphere makes money in three ways: concerts, advertising on its distinctive "exosphere," and original programming, notably Postcard from Earth, a 50-minute nature-oriented production that made its debut in 2023 and takes advantage of the arena's sound system. Tickets can cost more than $100.

Sphere is hoping that two new productions -- an enhanced version of The Wizard of Oz, and From The Edge, based on extreme sports -- will draw viewers to the Vegas arena when concerts aren't playing. The original productions are more lucrative because of profit-sharing splits with musical acts. The Wizard of Oz will debut this summer, and From The Edge in 2026. Ariel's Rogers thinks audiences will be impressed with the Oz experience, telling a recent Gabelli Funds investment conference that viewers will "feel like they're in the cyclone with Dorothy."

The Abu Dhabi arena is a key part of the company's future. Unlike the Vegas Sphere, development partners would pay to build new arenas, including the one in Abu Dhabi, with Sphere Entertainment getting high-margin royalty and other income. The company is also developing roughly 5,000-seat prototypes, smaller than the Vegas Sphere, which seats 17,600. "Any city that has global aspirations and a high volume of tourism could benefit by creating one of these," says Supino, who has an Outperform rating on the stock. His price target of $65 a share suggests the stock can double.

Supino now values the Las Vegas Sphere at $1 billion, or 15 times projected 2026 free cash flow; the Abu Dhabi arena at $750 million; $200 million for MSG Networks; plus the value of future global Spheres, for a total of more than $2 billion, twice Sphere Entertainment's current value.

Why the depressed stock and valuation? Complexity and profitability are high on the list. The company isn't profitable based on generally accepted accounting principles, generates little free cash flow, lost over $2 a share in the first quarter, and is projected to lose $7 a share in 2025 partially due to heavy noncash depreciation from the Sphere arena.

The company also has frustrated investors by not providing financial guidance or an indication of potential Vegas Sphere profits. It also hasn't provided a completion date for the Abu Dhabi Sphere.

Still, Sphere Entertainment is priced for a lot of bad news when a lot can go right. New Spheres will be built, higher profits in Vegas could materialize, and MSG Networks could be spun off. Another favorable scenario probably would be a company sale, if the Dolans were willing. Many potential buyers could surface, including Live Nation Entertainment, the country's biggest concert promoter and Ticketmaster owner.

A sale might be a long shot, but the stock is cheap enough that there doesn't need to be a deal for it to work. James Dolan appears to think so. He took nearly all of his compensation -- $18 million last year -- in stock.

This may be the time it makes sense to bet with the Dolans.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 09, 2025 16:17 ET (20:17 GMT)

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