Sphere Entertainment Co. (NYSE:SPHR) Shares Fly 28% But Investors Aren't Buying For Growth

Those holding Sphere Entertainment Co. (NYSE:SPHR) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 50% share price drop in the last twelve months.

Although its price has surged higher, Sphere Entertainment's price-to-sales (or "P/S") ratio of 0.5x might still make it look like a buy right now compared to the Entertainment industry in the United States, where around half of the companies have P/S ratios above 1.3x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Sphere Entertainment

How Has Sphere Entertainment Performed Recently?

With revenue growth that's superior to most other companies of late, Sphere Entertainment has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Keen to find out how analysts think Sphere Entertainment's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Sphere Entertainment's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 63%. The latest three year period has also seen an excellent 99% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue growth is heading into negative territory, declining 17% each year over the next three years. That's not great when the rest of the industry is expected to grow by 9.6% each year.

With this information, we are not surprised that Sphere Entertainment is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Sphere Entertainment's stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's clear to see that Sphere Entertainment maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Sphere Entertainment that you should be aware of.

If these risks are making you reconsider your opinion on Sphere Entertainment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.