Returns as of 03/01/2022
Returns as of 03/01/2022
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The internet changed a lot about business. That’s obvious. But it affected some industries much more than others. Many high-profile book stores, video rental outlets and newspapers ended up in bankruptcy. But a few have adapted and are thriving today.
A great example is New York Times (NYSE:NYT). Its shares fell 85% in the decade that followed Y2K. Today, it is a profitable company with solid growth. But its prospects are brighter than many might realize. One comment from the CEO highlights just how much further the company plans to go in its transformation.
Image source: Getty Images.
Drama is good for the news business. And the last few years have provided may stories that the people have wanted to keep up with. The rate of annual subscription growth doubled in 2016. Since then, revenue is 33% higher and free cash flow per share has more than tripled.
Wall Street has taken notice. Both the share price and the company’s price-to-sales (PS) ratio are up substantially. But that shouldn’t scare potential investors away.
NYT data by YCharts
After beginning to charge for online content in 2011, subscriptions have become a growing part of its business. . Although many experts thought news outlets wouldn’t be able to monetize content other than through advertising, The New York Times has proven them wrong.
The company has two important trends in its favor: subscription revenue and digital content. Wall Street loves subscriptions because it offers a much more predictable revenue stream than having to continuously win sales. By the end of 2020, 67% of the company’s revenue was derived that way.
Data source: The New York Times. Chart by Author.
That was also the year digital revenue overtook print. As you might expect, posting content online is a lot more profitable than printing and distributing physical newspapers.
The EBIT margin — the percent of revenue that ends up as earnings before paying interest and taxes — has climbed from 3% to 14% in a little over five years. That explains why investors are willing to pay so much more for every dollar that The New York Times brings in. It is generating more profit.
With a powerful brand, there are many paths to growth. In the February earnings call, CEO Meredith Kopit Levien noted just how much potential growth exists when she stated:
Our latest audience research suggests there are now at least 135 million adults worldwide who are paying or willing to pay for one or more subscriptions to English-language news, sports coverage, puzzles, recipes, or expert shopping advice.
Compare that to the subscription numbers above and it’s clear that the company has an enormous market it can still reach. Two recent acquisitions show how serious Levien is about doing just that.
In January, it acquired The Athletic — an online sports news outlet — for $550 million. The deal brought with it an additional 1.2 million subscribers.
Later that same month, it purchased Wordle. The online word game was only released in October and already has millions of daily players. It is a nice compliment to the company’s iconic crossword puzzles.
With an iconic global brand, a huge addressable market and management team making investments to take advantage of it, the stock would be interesting based solely on qualitative factors. Add in increasing profitability and The The New York Times climbs high on my radar.
The valuation might be three times what it was when Americans cast their ballots in 2016. But the company is living up to the expectations. Shares are down 26% from their recent al-time high and I expect to be a buyer on any further weakness.
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Stock Advisor launched in February of 2002. Returns as of 03/01/2022.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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