When you see that almost half of the companies in the Entertainment industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, Sphere Entertainment Co. (NYSE:SPHR) looks to be giving off some sell signals with its 1.9x P/S ratio.   Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.  

NYSE:SPHR Price to Sales Ratio vs Industry April 22nd 2024

What Does Sphere Entertainment's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Sphere Entertainment has been doing relatively well.   It seems the market expects this form will continue into the future, hence the elevated P/S ratio.  However, if this isn't the case, investors might get caught out paying too much for the stock.    

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

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

In order to justify its P/S ratio, Sphere Entertainment would need to produce impressive growth in excess of the industry.  

Retrospectively, the last year delivered an exceptional 128% gain to the company's top line.   Pleasingly, revenue has also lifted 36% in aggregate from three years ago, thanks to the last 12 months of growth.  Therefore, it's fair to say the revenue growth recently has been superb for the company.  

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 23% per year over the next three years.  Meanwhile, the rest of the industry is forecast to only expand by 9.7% per annum, which is noticeably less attractive.

With this information, we can see why Sphere Entertainment is trading at such a high P/S compared to the industry.  It seems most investors are expecting this strong future growth and are willing to pay more for the stock.  

What Does Sphere Entertainment's P/S Mean For Investors?

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.

As we suspected, our examination of Sphere Entertainment's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S.  At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio.  Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Sphere Entertainment that you need to be mindful of.  

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.