The past six months have been a windfall for Sphere Entertainment\u2019s shareholders. The company\u2019s stock price has jumped 82.8%, hitting $116.50 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.<\/p>\n
Is there a buying opportunity in Sphere Entertainment, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it\u2019s free<\/a>.<\/p>\n We\u2019re glad investors have benefited from the price increase, but we don’t have much confidence in Sphere Entertainment. Here are three reasons you should be careful with SPHR and a stock we’d rather own.<\/p>\n A company\u2019s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Sphere Entertainment grew its sales at a 18.1% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.<\/p>\n Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.<\/p>\n Sphere Entertainment has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 7.5%, below what we\u2019d expect for a consumer discretionary business.<\/p>\n As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.<\/p>\n Sphere Entertainment posted negative $431.5 million of EBITDA over the last 12 months, and its $961.5 million of debt exceeds the $507.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.<\/p>\n We implore our readers to tread carefully because credit agencies could downgrade Sphere Entertainment if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Sphere Entertainment can improve its profitability and remain cautious until then.<\/p>\n<\/p><\/div>\n We cheer for all companies serving everyday consumers, but in the case of Sphere Entertainment, we\u2019ll be cheering from the sidelines. After the recent surge, the stock trades at 18.8\u00d7 forward EV-to-EBITDA (or $116.50 per share). This valuation tells us a lot of optimism is priced in – we think there are better stocks to buy right now. Let us point you toward one of Charlie Munger\u2019s all-time favorite businesses<\/a>.<\/p>\n WHILE YOU\u2019RE HERE: Top 9 Market-Beating Stocks.<\/strong> The best stocks don’t just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.<\/p>\n But our AI platform says the party isn’t over. Find out which 9 stocks made the cut this week \u2014 FREE. Get Our Top 9 Market-Beating Stocks for Free HERE<\/strong><\/a>.<\/p>\n<\/div>\n<\/div>
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