Madison Square Garden's Hidden Gem Moment: Why the Russell Exclusion is a Contrarian's Delight

The exclusion of Madison Square Garden Entertainment Corp (NYSE: MSGE) from the Russell 3000 Value Index on June 27, 2025, has sparked a contrarian opportunity in the live entertainment sector. While AI-driven stocks dominate headlines, MSGE's resilient financials, strategic share buybacks, and undervalued status make it a compelling play for investors willing to look beyond the hype. Let's dissect why this index drop could be the setup for a long-overdue rebound.

The Contrarian Catalyst: Index Exclusion and Passive Fund Flows

When the Russell 3000 Value Index reconstituted on June 27, MSGE was among the casualties. This exclusion, effective after the market close, removed the company from passive fund flows tied to the index. For contrarians, this is a buying signal: the stock's $39.90 price tag at the time reflects a 12.4x trailing EBITDA multiple—well below its 5-year average and a stark contrast to AI-focused peers trading at inflated valuations.

The move also aligns with a broader shift in Russell's strategy, as the fund transitions to semi-annual reconstitutions starting in 2026. But for now, MSGE's removal creates a vacuum for active investors to scoop up shares of a company with $242.5 million in Q3 FY25 revenues (up 6% year-over-year) and $27.3 million in operating income, a 63% jump compared to 2024.

Why MSGE's Financials Defy the AI Narrative

While AI stocks like NVIDIA and Alphabet command headlines, MSGE's fundamentals are quietly strong. Its Q3 results reflect a robust live entertainment recovery:
- Entertainment Revenue: Up 10% to $160.2 million, driven by sold-out shows at Madison Square Garden and the record-breaking Christmas Spectacular at Radio City Music Hall.
- Cost Discipline: Direct operating expenses fell 4% to $108.0 million, thanks to leaner event planning and venue optimization.
- Share Repurchases: $40 million in buybacks year-to-date, with $70 million remaining under its authorization. Since its spinoff from Sphere Entertainment in 2023, MSGE has repurchased $180 million in total—a clear sign of confidence in its valuation.

The AI Angle: Energy Infrastructure and Venue Strategy

Critics may dismiss live entertainment as a “legacy” sector, but MSGE is positioning itself at the intersection of two megatrends: the AI-driven energy boom and the return of in-person events.

First, the global push for $500 billion in AI infrastructure spending by 2028 is increasing demand for energy-efficient spaces. MSGE's venues—strategically located near tech hubs like NYC and LA—are adjacent to clean energy grids, aligning with corporate ESG goals. Data centers and hybrid events (part physical, part AI-enhanced) will rely on such spaces, creating a new revenue stream.

Second, the live entertainment sector is roaring back. MSGE's third-quarter results reflect strong ticket sales and sponsorships, with adjusted operating income up 50% to $57.9 million. As consumers prioritize experiences over goods, venues like Radio City Music Hall remain irreplaceable cultural touchstones.

The Ariel Fund's Contrarian Bet

The Ariel Fund, a $4.6 billion value-oriented fund, has doubled down on MSGE, holding it as a top position. This is notable because Ariel has been reducing exposure to non-AI stocks—a stance that makes its conviction in MSGE all the more compelling. The fund's manager, John Rogers, has cited MSGE's undervaluation relative to peers and its ability to generate cash even as broader markets grow cautious on small-caps.

Risks and the Bear Case

• Index Exclusion Volatility: Passive funds exiting the stock could keep near-term pressure on the price.
• AI Overhang: If investors continue to shun “old economy” stocks, MSGE's recovery could lag.
• Live Event Plateau: A slowdown in ticket sales or a resurgence of remote entertainment could dent revenues.

The Bull Case: A 20x Multiple Rebound

Analysts project a 12-month target price of $52–$55, implying a 20x EBITDA multiple—a return to historical norms. With $3.04 billion in enterprise value and a $1.89 billion market cap, MSGE trades at a 7.7x EBITDA multiple, a discount even to peers like Live Nation. The catalysts?
1. Share Repurchases: The remaining $70 million buyback authorization could boost EPS.
2. AI Synergy: Venues retrofitted for energy efficiency could attract corporate partnerships.
3. Event Pipeline: A slate of high-profile concerts (e.g., Taylor Swift, Rolling Stones) in 2025–2026 bodes well for cash flow.

Investment Thesis: Buy the Dip, Ignore the Noise

The Russell exclusion is a short-term headwind, but MSGE's fundamentals—strong cash flow, disciplined capital allocation, and exposure to AI-driven infrastructure—position it as a hidden gem. Investors should:
- Buy on dips below $40, targeting the $52–$55 range.
- Hold for 12–18 months, focusing on EBITDA expansion and buyback progress.
- Avoid if you believe live entertainment demand will crater or AI infrastructure spending will bypass physical venues.

In a market obsessed with AI's next disruption, MSGE offers a rare chance to profit from what already works. Its venues are the stage where the future of entertainment—and energy—will be written.

Disclosure: This analysis is for informational purposes only. Always conduct your own research before making investment decisions.