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Robert Stephens, CFA
Robert Stephens, CFA
Articles (109) 

Why The New York Times Has Investment Appeal

The stock could generate further capital growth

February 13, 2019 | About:

Investments in improving its product could boost The New York Times Co.’s (NYSE:NYT) stock performance as well as diversify the demographics of its customer base.

Digital subscription growth is expected to remain high, allowing the company an opportunity to raise prices as it seeks to improve margins.This growth is being complemented by a concentrated advertising strategy, which has delivered relatively strong results.

Although a slowdown in print advertising revenue could offset the gains being made in digital, the latter is becoming an increasingly dominant part of the business.

Having surged 29% in the last year versus a 2% rise for the S&P 500, the stock could have growth potential.

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Investment

Investment in the company’s journalism function could catalyze its financial performance. It is seeking to broaden and deepen its journalism offering in order to enhance its position in investigative reporting. As part of this initiative, the newspaper company added over 120 new positions over the last year, bringing its total number of journalists to 1,600, which is its highest-ever level. The New York Times intends to increase its rate of hiring in the future, seeking to develop growing expertise in a range of areas in order to improve reader engagement and boost conversion of paying subscribers.

The New York Times will also invest in further product innovation. It has enjoyed success with the release of its podcast, "The Daily," which has attracted a broader range of consumers. It is now Apple (NASDAQ:AAPL)’s most downloaded podcast, with 75% of its audience under the age of 40. The company plans to launch additional products aimed at a younger audience in order to further its digital growth ambitions. A new TV show called "The Weekly" and a 5G partnership with Verizon (NYSE:VZ) could improve its competitive advantage as well.

Updated strategy

The company's new advertising strategy has been successful. Taking a different approach than many of its peers, the New York Times has focused on large-scale partnerships with major global brands as well as a suite of creative services, while having minimal exposure to open-market programmatic advertising. This approach contributed to a 32% increase in digital advertising revenue in the most recent quarter.

Digital subscription growth is expected to remain strong. In the most recent quarter, the company’s digital subscription revenue increased 18% on a like-for-like basis. Its audience behavior and week-to-week subscription additions indicate its momentum is broad-based, rather than being reliant upon periods of political significance such as the recent midterm elections.

Plans to raise prices for digital subscriptions for the first time since the launch of the pay model in 2011 are set to be put into effect. The company has a long history of adjusting prices for its home delivery products to reflect the changing economies of print. It is confident customer loyalty is sufficiently high enough to withstand a price increase, which could have a positive impact on margins.

Risks

Although The New York Times has recorded a high growth rate in digital subscriptions, print still contributed 46% of total advertising revenue in the most recent quarter. On a year-over-year basis, print advertising revenue declined 6%. Since it accounts for a large minority of total revenue, it could act as a drag on the company’s overall performance in the future. In addition, since the newspaper giant relies on a relatively small number of high-value digital advertising deals, its quarter-to-quarter results could be volatile. Alongside a declining print business, this may lead to periods of disappointing top-line performance.

In the long run, digital is set to become the company’s major contributor to total revenue. In the most recent quarter, print advertising became the smallest of its four principal revenue streams. This suggests the company is becoming less reliant on print advertising, while strength in its digital segment meant total advertising revenue grew 11% last quarter. Though the company is still in transition between print and digital opportunities, the process is expected to be hastened by its new target to reach 10 million digital subscribers by 2025.

Verdict

An improved customer offering could boost engagement and conversion rates. The New York Times is investing in adding to its staff, while also seeking to offer a more innovative product offering.

A price increase in digital subscriptions could lead to higher margins. Since the company plans to gain 10 million digital subscribers by 2025, price increases could have a significant impact on its revenue growth outlook. Alongside a concentrated advertising strategy, this may catalyze its financial performance.

Although print remains a significant part of the business, it is experiencing a continued slowdown. Digital growth is offsetting these losses and is becoming an increasingly more important part of the New York Times' business.

Having outperformed the S&P 500 in the last year, the stock could deliver further capital growth in the long run.

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