Looking for investment opportunities in the entertainment industry? Let’s take a look at the pros and cons of Disney and Sphere Entertainment.
Everyone knows The Walt Disney Company (DIS 0.71%). The entertainment giant has been around for over a century, creating memories for kids and parents alike. But the company is changing recently with its focus on streaming media.
Sphere Entertainment (SPHR 3.30%) is another classic name in disguise, formerly known as Madison Square Garden Entertainment. The old name now belongs to Madison Square Garden Corporation, the live entertainment division that Sphere spun off when it adopted its new name in April 2023.
Sphere Entertainment and Disney are both legendary entertainment giants undergoing dramatic strategic shifts. So far so good, but which stock will be the better investment in August 2024?
Let’s find out.
Compare the two stocks by numbers
metric
Walt Disney
Sphere Entertainment
Market capitalization
$163.7 billion
$1.7 billion
Revenue (last 12 months)
$90 billion
$1 billion
Net profit margin (TTM)
5.3%
(19.5%)
Free Cash Flow (TTM)
$8 billion
($284 million)
In this matchup, Disney is the larger entertainment empire, so the outcome won’t be close. Sphere Entertainment’s operations would look like a rounding error on Disney’s financial statements.
Comparing the two companies in terms of enterprise value is difficult: Disney generates huge cash profits and had positive adjusted earnings over the past year, even during the worst of the coronavirus lockdowns. The stock trades at a modest valuation of 23 times earnings and 21 times free cash flow.
By contrast, Sphere is unprofitable by most standards, and even after major adjustments, the division is still not profitable, although its state-of-the-art Las Vegas facility is beginning to turn a profit.
Still, fewer valuation metrics apply to Sphere Entertainment, making the stock often look affordable. The company’s price-to-sales ratio (P/S) is 1.7, just below Disney’s 1.8. And if you compare companies by the accounting value of their assets, which include theme parks and a giant digital sphere, Sphere Entertainment’s enterprise value-to-asset ratio (EV/A) is 0.4. From this perspective, Disney’s EV/A multiple of 1.1 looks downright expensive.
Future business plans
Sphere Entertainment plans to build a global network of advanced entertainment venues modeled after its namesake arena in Las Vegas. It’s an ambitious undertaking, but one that also comes with risks. These high-tech buildings are expensive, and the capital expenditures to fund their construction will weigh on the company’s income statement for years in the form of depreciation expenses. The company has $573 million in cash reserves, so it can afford to continue burning cash for a few more years, but 61% of its $1.37 billion in long-term debt comes due next year. With interest rates remaining high, now is not the best time to refinance a large loan balance.
So Sphere Entertainment’s low valuation ratio may be a given, as investors see financial risks in its growth-oriented business plan.
Meanwhile, Walt Disney is finding its way in an increasingly digital era of entertainment: Its media streaming services generated modest operating profits in its recently reported third quarter, and hit sequels like “Inside Out 2” and “Deadpool & Wolverine” show that consumers remain hooked on the company’s content portfolio.
I hope you notice my tongue-in-cheek attitude that Disney stock looks expensive. The company’s free cash flow, P/S, and price-to-book ratio are well below the averages of the S&P 500 (SNPINDEX: ^GSPC) constituents. This is a safe haven stock that you can buy in almost any economic climate and expect to do well over the long term.
So, which stocks should you buy today?
There may be a time and a place to buy Sphere Entertainment shares, but only for small, speculative purchases. This exciting growth story could derail at any time, and if the company’s digitized venue idea proves profitable in the long term, we’ll likely see a flurry of similar concepts pop up.
You can’t go wrong with Walt Disney. Disney has been a staple of my stock portfolio for many years, and I wouldn’t hesitate to start a new position right now. As I said, Disney shares are pretty affordable, and I have high hopes for the company’s online entertainment plans.
In short, I’d rather buy Disney stock than Sphere Entertainment for now. Ask me again when the high-tech venue manager finds a path to sustainable profits. For now, it’s a risky idea.