Everybody knows the Walt Disney Company (NYSE: DIS) . The entertainment giant has been around for more than a century, making memories for children and parents. But the House of Mouse is changing with a heavy focus on streaming media these days.
Sphere Entertainment (NYSE: SPHR) is also a classic name in disguise, formerly known as Madison Square Garden Entertainment. The old name now belongs to Madison Square Garden Corp. , a live entertainment division that was spun off as Sphere adopted its new name in April 2023.
So, both Sphere Entertainment and Disney are legendary entertainment giants making radical strategy changes. So far, so good -- but which of these stocks is the better investment in August 2024?
Let's find out.
Weighing two stocks by the numbers
|
Metric |
Walt Disney |
Sphere Entertainment |
|---|---|---|
|
Market cap |
$163.7 billion |
$1.7 billion |
|
Revenue (TTM) |
$90.0 billion |
$1.0 billion |
|
Net profit margin (TTM) |
5.3% |
(19.5%) |
|
Free cash flow (TTM) |
$8.0 billion |
($284 million) |
Data sourced from Morningstar, 8/22/2024. TTM = trailing 12 months.
Disney is the larger entertainment empire in this matchup, and it's not a close call. Sphere Entertainment's business activities would look like a rounding error in Disney's financial statements.
The companies are tricky to compare in terms of valuation. Disney churns out massive cash profits and its trailing adjusted earnings were positive even in the darkest days of coronavirus lockdowns. This stock trades at the modest valuation of 23 times earnings and 21 times free cash flow.
In contrast, Sphere is unprofitable by most measures. Its state-of-the-art Las Vegas venue is starting to generate revenue, but that segment is still not profitable -- even after heavy adjustments.
That being said, the few valuation metrics that work with Sphere Entertainment often make the stock look affordable. Its price to sales (P/S) ratio stands at 1.7, just below Disney's 1.8. And if you weigh the companies by the accounting value of assets such as theme parks and giant digital spheres, Sphere Entertainment's enterprise value to assets (EV/A) lands at 0.4. Disney looks downright expensive from that perspective with a 1.1 EV/A ratio.
Future business plans
Sphere Entertainment plans to build a global network of advanced entertainment venues in the mold of its namesake arena in Las Vegas. It's an ambitious venture, but also a risky one. These high-tech buildings are expensive, and the capital expenses financing their construction will weigh on the company's income statement for years in the form of depreciation expenses. The company can afford a few more years of cash-burning operations, given its $573 million in cash reserves, but 61% of its $1.37 billion in long-term debt is due for repayment in the next year. With interest rates riding high, this is not the best time to refinance large loan balances.
So maybe Sphere Entertainment deserves its low valuation ratios. Investors see financial risks in this growth-oriented business plan.
Meanwhile, Walt Disney is finding its way in an increasingly digital entertainment era. Its media-streaming services generated a modest operating profit in the recently reported third quarter, while successful sequels Inside Out 2 and Deadpool & Wolverine suggest that consumers remain addicted to its content portfolio.
I hope you noticed my tongue-in-cheek attitude to the idea that Disney's stock looks expensive. Its price to free cash flow, P/S, and price-to-book ratios sit firmly below the average values among S&P 500 (SNPINDEX: ^GSPC) members. This is a safe-harbor stock that you can buy in almost any economy and expect good long-term results.
Which stock should you buy today, then?
There may be a time and a place to buy Sphere Entertainment's stock, but only in small and speculative portions. This exciting growth story could derail at any time, and you will probably see similar concepts popping up by the truckload if the company's digitalized venue ideas turn out to be profitable in the long run.
And you can't really go wrong with Walt Disney. It's a longtime stalwart of my own stock portfolio and I wouldn't hesitate to start a fresh position right now -- as I said a minute ago, Disney's stock is pretty affordable and I have high hopes for its online entertainment plans.
Long story short, I'd much rather buy Disney stock than Sphere Entertainment right now. Ask me again when the high-tech venue manager finds a path to sustainable profits. For now, it's a risky idea.
Before you buy stock in Walt Disney, consider this: