Sphere Entertainment Co.'s (NYSE:SPHR) Shareholders Might Be Looking For Exit

With a median price-to-sales (or "P/S") ratio of close to 1.6x in the Entertainment industry in the United States, you could be forgiven for feeling indifferent about Sphere Entertainment Co.'s (NYSE:SPHR) P/S ratio, which comes in at about the same. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Sphere Entertainment

How Sphere Entertainment Has Been Performing

Recent times have been advantageous for Sphere Entertainment as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sphere Entertainment.

How Is Sphere Entertainment's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Sphere Entertainment's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 79% gain to the company's top line. The latest three year period has also seen an excellent 59% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 3.2% as estimated by the two analysts watching the company. Meanwhile, the broader industry is forecast to expand by 12%, which paints a poor picture.

With this in consideration, we think it doesn't make sense that Sphere Entertainment's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What We Can Learn From Sphere Entertainment's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our check of Sphere Entertainment's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Sphere Entertainment (of which 1 is potentially serious!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.