Shares of Sphere Entertainment (NYSE: SPHR) declined on Thursday following a recommendation from a research firm to short the recently falling stock.
In a message to clients, Hedgeye analyst Andrew Freedman indicated that the Las Vegas Strip entertainment venue operator is encountering various challenges, suggesting that the stock might experience a decline of up to 30% in the coming months.
"SPHR faces an array of challenges that we expect will weigh on growth through 2025 and potentially beyond,” Andrew Freedman wrote. “Without significant growth in the Sphere Experience segment to offset persistently high operating costs, profitability remains elusive.”
His remarks align with those of other analysts who have stated that Sphere Entertainment must demonstrate skill in securing top-tier talent and programming. Certain sell-side analysts have suggested that Sphere must secure high-profile performances and significant one-time events to boost its financial sustainability, as the venue incurs high operating expenses and struggles to manage those costs with only a single screen.
Sphere Stock Preferred Short Target
Hedgeye's negative outlook on Sphere stock came as the shares experienced a 10% drop over the last month, with short interest at 29.5%, indicating that the stock is a popular choice for short sellers.
That perspective is supported by the stock's recent decline and the company's operating loss of $125.1 million in the third quarter. Four straight months of decreasing gross gaming revenue (GGR) in Nevada further strengthens the bearish argument against Sphere. Hedgeye’s Freedman noted that the option of decreasing show volumes may seem counterproductive in terms of Sphere enhancing top-line growth.
“We have serious doubts about the sustainability of reducing show volumes as a long-term strategy to maintain higher utilization rates and grow revenue,” observed the analyst.
In his report, Freedman also noted the frequently referenced burden of Sphere Entertainment's ownership of the debt-ridden Madison Square Garden Network. Nevertheless, Sphere has recently taken measures to ease those worries. Sphere revealed the agreement with its creditors in a submission to the Securities and Exchange Commission (SEC) on October 11. The regional sports network's debt, which is almost $830 million, constitutes the bulk of Sphere's total liabilities and has been perceived by some investors as a hindrance to Sphere's stock.
Sphere Stock Difficult to Short
Despite the previously mentioned high short interest, financial difficulties in the third quarter, and significant operating expenses, Sphere stock could be considered a challenging option to short. Short positions on the shares may encounter headline risk if the company reveals new, high-profile residencies.
Similarly, Chairman and CEO James Dolan mentioned that Sphere is diligently creating new entertainment choices for non-residential days at the venue, such as a Sphere-adapted rendition of the 1939 classic “The Wizard of Oz.”